Buy Fortis Healthcare Ltd for the Target Rs.1,130 by Motilal Oswal Financial Services Ltd
High Court orders forensic audit; operational aspects remain intact Brownfield expansion, richer mix, and Agilus recovery to sustain growth
* The Delhi High Court has directed the appointment of a forensic auditor to examine certain historical transactions involving Fortis Healthcare (FORH), including the dissipation of the erstwhile promoters’ stake.
* On overall basis, the audit would reconstruct the entire chain of transactions and identify persons, companies, banks and financial institutions involved in depletion of FORH shares.
* Having said this, over the past 15 months, FORH has delivered strong, volume-led (number of patients treated) growth in its hospital segment. Notably, the company has maintained occupancy at an elevated 68-69% despite a 17% increase in operating beds over the past year.
* This growth was partly supported by improved realizations. Overall performance remained robust despite the adverse impact of medicine pricing for patients under the ECHS/CGHS category.
* The diagnostics segment is gradually recovering, with an improving test mix supporting better realizations. Following extensive efforts to create brand recall for Agilus, FORH is now geared to deliver stronger growth going forward.
* We expect 13%/18% revenue/EBIDTA CAGR over FY26-28, led by increased number of patients being treated. We expect 10%/12% CAGR in revenue/EBITDA in the diagnostics segment, supported by growth in tests/sample volumes as customer touchpoints expand and the business gradually shifts toward the B2C segment.
* We continue to assign 30x/23x 12M forward EV/EBITDA to the company’s hospital/diagnostics business and arrive at an SOTP-based TP of INR1130. Maintain BUY
Comprehensive forensic audit ordered by Delhi High Court in the recent hearing
* India's Delhi High Court has ordered a forensic audit into the alleged asset dissipation by former promoters of FORH.
* The fact-finding inquiry will investigate the alleged disposal of the former promoters' FORH shareholding, the subsequent change in control of the Indian hospital operator, and the role of the relevant stakeholders.
* The key issue is whether former FORH promoters, Malvinder Mohan Singh and Shivinder Mohan Singh, moved or disposed of assets that could have been used to satisfy an arbitration award won by the Japanese drugmaker in CY16.
* While IHH was not a party to the execution proceedings against the former FORH promoters, the Delhi High Court has directed an examination of IHH’s stake acquisition in FORH.
* The overall forensic audit process is likely to take 6M. Meanwhile, FORH would continue to evaluate strategic/operational measures to drive earnings growth and enhance long-term value of stakeholders.
Valuation and view
* We value FORH on an SOTP basis (30x EV/EBITDA for hospital business and 23x EV/EBITDA for diagnostics business) to arrive at a TP of INR1,130.
* We believe FORH is well placed to sustain growth in its hospital business through:
a) optimization of the case mix/payor mix
b) brownfield expansion, supporting strong brand recall-led growth. The diagnostic business is also well positioned to scale sample volumes and patient footfalls by expanding touchpoints and widening its test menu. We reiterate our BUY rating.
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