Maintain ‘buy’ on Fortis Healthcare with TP of Rs 160

Fortis posted Q2FY21 revenue along expected lines while Ebitda beat our estimate by 16% owing to lower employee costs that pushed up Ebitda margin to 12.1%. Hospitals’ occupancy recovered to 57% (from 37% in Q1FY21).

Growth at SRL was aided by Covid-19 while non-Covid-19 volumes have touched pre-Covid-19 levels.

The company has resumed expansion amid Covid-19 as it expects operations to normalise fully by Q1FY22; Covid-19 testing too would continue to aid SRL sales for a few quarters. Given its growth initiatives and cost control, Fortis is poised for long-term growth. Besides, the open offer implies short-term upside with the case hearing likely on December 1. Retain ‘buy’ with an SoTP based TP of Rs 160.

Revenue decreased 18% y-o-y led by a 23% plunge in hospital business that was partially offset by 4% growth in SRL. Hospital Ebitda turned positive with margin at 11.3% (versus -16% in Q1FY21) on lower costs. Salary cuts were rolled back, but some parts of cost savings are here to stay, and management expects to achieve 12% savings in H2. Covid-19 accounted for 28% of SRL’s revenue and the company expects it to contribute till Q1FY22. The company is seeing a larger opportunity in these tests and is looking to capitalise on it. During the quarter, it reduced net debt by Rs 1.24 billion to Rs 11.14 billion.

Management plans to re-conquer best-in-class occupancy of 73–75% by adding new specialties, upgrading the existing infrastructure and improving market share in the cash market. Further cost control adds to positives.

Commissioning of the WIP facility with no major expansion and turning around the lagging facilities, which are low-occupancy and low-Ebitda, would help improve margins. Addition of 1,200–1,300 beds in a phased manner over the next four–five years will further build up momentum. The company has already started incurring capex for 375 beds (for next two years) and plans to ramp up the Arcot Road, BG Road and Noida facilities.