Buy Fortis Hospitals Ltd For Target Rs.940 by Motilal Oswal Financial Services Ltd
Operating gains offset by higher D&A, interest, and tax Bed addition/diagnostic network expansion underway
* Fortis Healthcare (FORH) delivered a marginally better-than-expected performance in 1HFY27, primarily driven by stronger-than-anticipated profitability in diagnostics as well as hospital business. Hospital revenue grew 18.8% YoY, aided by higher patient volumes and a 6.1% improvement in ARPP.
* Occupancy improved, despite addition of beds, to 72% in 2QFY27 (vs. 71% in 2QFY26). Higher realization per patient further supported growth as well as profitability in the Hospital segment.
* FORH also continues to expand its network, with the acquisition of 110-bed Suguna Hospital in Bengaluru and a long-term healthcare services agreement for a 400+ bed hospital in Ashok Vihar, Delhi. The company aspires to increase its bed capacity to ~12,000 over the next 3-5 years from the current ~6,300 beds through brownfield expansion, O&M arrangements, and inorganic opportunities.
* Focus specialties, including Oncology, Neuro Sciences, Cardiac Sciences, Gastroenterology, Orthopedics, and Renal Sciences, grew 16.7% and contributed 60% to hospital revenue.
* The diagnostics business continues to gain traction, driven by higher test volume from existing customers as well as addition of new customers. Agilus added ~300 customer touchpoints during the quarter, taking its network to 4,551, while the B2C share improved to 54% from 52% in 2QFY26. Growth in preventive and specialized diagnostics, along with network expansion and an improving business mix, should support further scale-up and profitability.
* We reduce our earnings estimate by 4%/7% for FY27/FY28, factoring in:
a) ramp-up of newer beds diluting margins in the initial phase
b) margins caps with respect to oncology drugs.
* We assign 25x/23x 12M forward EV/EBITDA to the company’s hospital/diagnostics businesses, respectively, and arrive at an SOTP-based TP of INR940. Reiterate BUY.
Healthy revenue growth offsets margin contraction
* FORH’s 2QFY27 revenue grew 17.3% YoY to INR27.3b (in line).
* EBITDA margin contracted 110bp YoY to 22.8%. This was due to an increase in employee expenses and other expenses (up 140bp/80bp as % of sales).
* EBITDA grew 12% YoY to INR6.2b (beat by 5%).
* Adj. PAT was largely stable YoY to INR3.1b (beat by 5%).
* For 1HFY27, Revenue/EBITDA/PAT grew 17.4%/10.8%/2.6% to INR52.8b/INR11.6b/INR5.7b.
Reiterate BUY
* We reduce our earnings estimates by 4%/7% for FY27/FY28, factoring in: a) the ramp-up of newer beds diluting margins in the initial phase, and b) margins caps with respect to oncology drugs.
* We assign 25x/23x 12M forward EV/EBITDA to the company’s hospital/diagnostics businesses, respectively, and arrive at an SOTP-based TP of INR940. Reiterate BUY.
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