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Transition behind, growth ahead

Hospitals drive core growth, while diagnostics recovery adds incremental upside

* After the change in promoter ownership to IHH Healthcare in FY19, Fortis Healthcare (FORH) has undergone a structural transformation, from a stressed, governancechallenged asset to a professionally managed, execution-led hospital platform. The transition was marked by balance sheet clean-up, exit of non-core assets, and strengthening of governance practices.

* Since then, FORH has delivered a steady improvement in operating performance, from sales/EBITDA of INR45b/INR2b and a loss of INR1.5b in FY18 to sales/EBITDA/ PAT of INR90b/INR20.5b/INR10.8b over FY26E.

* During FY18-FY26, FORH has significantly increased its bed capacity and improved its operational efficiency, driving a 33% CAGR in EBITDA.

* Interestingly, FORH is now in a comfortable position to fund brownfield bed additions of 400-500 annually over the next five years through internal accruals and explore any inorganic opportunities.

* Agilus Diagnostics, its diagnostics division, is emerging from a transition-heavy phase (brand migration, litigation and portfolio rationalization), with early recovery visible in volumes and realization (~8% YoY sales growth for 9MFY26 vs. 4% in FY25). Utilization-led growth, an improving test mix and hospital integration are expected to drive steady revenue growth and gradual margin expansion ahead.

* Overall, we estimate FORH to deliver a CAGR of 17%/22% in EBITDA/PAT over FY26- 28, driven by a) healthy patient volume growth, b) bed additions to support a higher number of patient treatments, c) price hikes and optimization of case mix and payor mix, and d) steady growth in test volume in diagnostics business.

* We value FORH on the SoTP basis, valuing the hospital business at 30x 12M fwd EV/EBITDA and the diagnostics business at 23x 12M fwd EV/EBITDA, to arrive at a TP of INR1,100. We have assigned EV/EBITDA multiple in line with peers (MAXH/APHS) to factor in a) the robust transformation in the existing business, b) a brownfield strategy of bed additions driving faster EBITDA break-even, and c) subsequently driving better return ratios. We initiate coverage on FORH with a BUY rating.

Hospitals: Core growth engine with improving mix and scalable expansion

* FORH operates a diversified pan-India hospital network (36 facilities, 6,000+ beds), with strong regional presence (North: 3,443 beds; South: 1,400 beds), providing a resilient and scalable growth base.

* The portfolio is increasingly tilted toward higher-acuity specialties, with CONGO mix at ~55% (+650bp vs. FY22), supporting ARPOB growth (~INR24-26m; ~10% CAGR) and improved revenue quality. CONGO represents a specialty mix of Cardiac, Onco, Neuro, Gastro, and Orthopedic services.

* Occupancy is stable at ~65-70%, indicating strong demand absorption and utilization.

* Expansion is driven by a cluster-led brownfield strategy and operations & management (O&M) partnerships, with 3,200+ bed additions planned by FY30, enabling a capital-efficient scale-up.

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