Buy Fortis Hospitals Ltd for the Target Rs 1,130 by Motilal Oswal Financial Services Ltd
In-line 1Q; core hospital business continues to excel Brownfield expansion/diagnostics scale-up reinforce growth visibility
* Fortis healthcare (FORH) delivered in-line 1QFY27 performance. The hospital business (85% of revenue) has seen robust growth in revenue, driven by growth in the number of patients treated. ARPOB growth (+2.6% YoY) partly supported revenue growth and profitability. On the other hand, diagnostics business was driven by improved realization per patient/test.
* Interestingly, FORH maintained occupancy at 69% YoY/QoQ despite 17% YoY/5% QoQ addition in operating beds to 3,418 in 1QFY27. From the case mix perspective, CONGO (cardiac, oncology, Neuroscience, gastro and orthopedics) sustained 62% share and grew 17% YoY in 1QFY27.
* Notably, FORH added one hospital in the 20%+ margin category, and one hospital moved up in the 10-15% margin category in 1QFY27.
* FORH added 200+ customer touchpoints in 1QFY27 and implemented efforts to increase the share of B2C tests (53% in 1QFY27 vs. 51% in 1QFY26). Test growth has been moderate and is yet to see the benefit of the expansion in the number of touchpoints and tests offerings.
* We maintain our estimates for FY27/FY28. We value FORH on SOTP basis (30x EV/EBITD 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 hospital business through
a) optimization of case mix/payor mix
b) implementing efforts to scale up the number of patients treated in new hospitals
c) brownfield expansion to drive strong brand recall-led growth. The diagnostic business is well-positioned to scale up samples and patients through increasing the touchpoints and widening the test menu. Maintain BUY.
Double-digit revenue growth intact; higher opex dents margin
* 1QFY27 revenue grew 17.5% YoY to INR25.5b (our est: INR25.2b).
* EBITDA margin contracted 150bp YoY to 21.1%, due to an increase in employee expenses (including doctor and consultation fees)/other expenses, up 185bp/90bp as % of sales.
* EBITDA grew 9.5% YoY to INR5.4b.
* An exceptional item of INR95m was related to the reversal of an impairment charge in an associate company.
* Adj. PAT grew 3.4% YoY to INR2.6b
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