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In Q1FY25, Fortis’ performance was in line with our expectations. Consolidated revenue stood at INR 18.6 bn, reflecting a growth of 12.2% YoY and 4.1% QoQ. The hospital business contributed INR 15.5 bn, showing a growth of 14.4% YoY and 4.0% QoQ, while the diagnostics business reported INR 3.4 bn, up 13.4% YoY and 15.7% QoQ. ARPOB/day grew by 9.7% YoY and 3.7% QoQ to INR 65,924. Occupancy levels were at 67% compared to 64% last year. EBITDA reached INR 3.4 bn, increasing by 25.7% YoY but declining by 10.1% QoQ. The EBITDA margin was 18.4%, which expanded by 199bps YoY but contracted by 291bps QoQ, primarily due to a 13.8% decline in hospital EBITDA (margin at 18.5% vs 22.3% in Q4FY24). The diagnostic business reported a 6.5% increase in EBITDA (margin at 16.1% vs 17.5% in Q4FY24).

* Hospital Business: Hospital business revenue growth was driven by a 9.7% YoY increase in ARPOB and higher occupancy compared to Q1FY24. The hospital business also benefited from a 15.7% growth in revenue from the company’s top six key medical specialties—Oncology, Gastroenterology, Neurosciences, Renal Sciences, Orthopedics, and Cardiac Sciences—in Q1FY25 compared to the same period last year. These specialties consistently contributed 63% to the overall hospital business revenues, similar to Q1FY24. Revenues from medical travel grew 11% YoY for the quarter, contributing 8% to the overall hospital business revenue, consistent with Q1FY24. Key facilities such as Mulund, Anandpur, BG Road, Shalimar Bagh, Amritsar, Mohali, FMRI, and Noida each achieved over 20% growth. The surgical to nonsurgical revenue ratio was 61:39. Hospital operating EBITDA was INR 2,870 mn with an 18.5% margin, showing an increase in contribution from 75.7% last year to 83.8% in Q1FY25. The company has maintained its hospital business EBITDA margin guidance at over 20%.

* Diagnostic Business: Agilus' performance was impacted by a rebranding exercise undertaken in May 2023. However, operating EBITDA margins (based on gross revenues) in Q1FY25 improved compared to the previous quarter's margins of 14.0%, primarily due to cost optimization initiatives. The preventive portfolio revenues grew by 13% in Q1FY25, contributing 12% to operating revenues, up from 10% in Q1FY24. The average realization per test was INR 340, and the per-patient revenue was INR 845. The company expects Agilus' growth to continue throughout the year and align with industry growth by FY26.

* EBITDA Margin Guidance: The margin improvement from 16.4% in Q1FY24 to 18.4% was driven by increased ARPOB, higher occupancy, and a shift in the specialized mix. The company expects this gradual recovery to continue in FY25. Management projects an EBITDA margin improvement of 200 basis points (slightly better in the hospital business) and anticipates a 25% increase in bed growth over the next two to three years.

* Outlook and Valuation: We anticipate a subdued growth due to several factors: a single-digit ARPOB increase compared to historically higher double-digit growth, 4-5 hospitals not operating as expected, ongoing rebranding expenses for Agilus in FY25 (which will impact margins), and slow growth in Agilus for the current fiscal year. We value the stock based on the SOTP methodology to arrive at a price target of INR 497 and maintain a REDUCE rating.

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