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In Q2FY25, Fortis’ performance was above our expectations. Consolidated revenue stood at INR 19,884mn, reflecting a growth of 12.3% YoY and 7% QoQ. The hospital business contributed INR 16.550mn, showing a growth of 13.9% YoY and 6.8% QoQ, while the diagnostics business reported INR 3,340mn, up 5.1% YoY and de-grew by 2.8% QoQ. ARPOB/day grew by 7.2% YoY and de-grew by 1.5% QoQ to INR 64,932. Occupancy levels were at 72% compared to 69% last year. EBITDA reached INR 4,348mn, increasing by 31.7% YoY and 27% QoQ. The EBITDA margin was 21.9%, which expanded by 321bps YoY and 344bps QoQ, primarily due to 11 hospitals contributing more than 20% margin which share 75% of the total hospital revenue.

* Hospital Business: Hospital business revenue growth was driven by a 7.2% YoY growth in ARPOB and higher occupancy compared to Q2FY24. The hospital business reported an operating EBITDA margin of 21.4%, a 300bps improvement from 18.4% in Q2FY24. It accounts for 82% of the total consolidated EBITDA. The hospital business saw a 7.6% increase in ARPOB reaching INR 2.37cr per annum. Revenue from key specialties like oncology, neuroscience, cardiac sciences, orthopedics, gastroenterology, and renal sciences was a major contributor to the growth. These specialties generated 61% of hospital revenue and saw a 13.6% YoY growth. The specialties of neuroscience and oncology saw growths of 17% and 19%, respectively. In comparison to Q2FY24, the number of robotic surgeries performed went up by a robust 57%. Medical travel brought in INR 1,340 million, a 6% increase in revenue. During the quarter, international business contributed about 8% of total revenue. Mulund, Shalimar Bagh, Mohali, and other important facilities all saw growth of more than 20%. Fortis will add 350-400 beds in FY26 with Noida and FMRI being fully commissioned, and some bed addition in Anandpur in Kolkata and VG Road in Bangalore.

* Diagnostic Business: The diagnostic business revenue stood at INR 3,725mn vs INR 3,603mn in Q2FY24. Operating EBITDA reached INR 800mn, up from INR 620mn in Q2FY24, with the margin improving to 21.5% from 17.2%. With the addition of more than 150 customer touchpoints during the quarter and 330 touchpoints in H1FY25, Agilus largely increased the size of its network. From a product standpoint, in Q2FY25, the revenue contribution is 33% from specialized testing, 55% from routine testing, and about 12% from the wellness portfolio. The wellness portfolio grew by 20%. The company expects Agilus' growth to continue throughout the year and align with industry growth by FY26.

* EBITDA Margin Guidance: The margin improvement from 18.4% in Q2FY24 to 21.9% was driven by increased ARPOB, higher occupancy, and a shift in the specialized mix. Management expects to achieve an EBITDA margin of 25-26% (including other income) by FY28.

* Outlook and Valuation: Fortis’s growth story is based on its expansion plan, increase in the share of diagnostic business, change in the specialty mix towards high-end, increase in the occupancy levels, and increase in the robotics surgeries. We have introduced FY27E and valued the stock based on the SOTP to arrive at a price target of INR 728 with a BUY rating on the stock.

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