‘Buy’ on Fortis Healthcare with target price of Rs 160

Diagnostics margin contracted 500bps to 17% and revenue declined 8%.

Fortis Heathcare (FORH) reported weak Q4FY20 numbers impacted by Covid-19. While hospital EBITDA margin contracted 50bps YoY to 11%, occupancy fell to 65% (from 68% levels). With cost control becoming the need of the hour, FORH has: 1) achieved Rs 800 m cost saving target in FY20; 2) reduced 25% fixed cost during Covid-19; and 3) brought down breakeven occupancy to 47% from 55% earlier. Diagnostics margin contracted 500bps to 17% and revenue declined 8%. Going forward, management expects hospital business to normalise only in Q3FY21 and diagnostics to achieve 90% of prelockdown revenue by July end. Hence, we revise down FY21/FY22E EBITDA 40%/20%.

SRL expects double-digit growth in B2C (9% in January and February) post normalcy riding network expansion and penetration. While operations are gradually improving, FORH is focused on undertaking cost rationalisation to help maintain margin.

Despite its best-in-class contribution margin of ~80%, FORH ranks among the lowest by productivity. The new CEO has achieved the company’s Rs 800-m savings target in FY20 led by a reduction in borrowing cost; strengthening of working capital management and non essential expenditures. We estimate cost savings coupled with improvement in occupancy and case mix could help FORH navigate the Covid-19 crisis and emerge strong.

Addition of 1,200-1,300 beds in a phased manner over the next four-five years will further help build up momentum. We believe FORH can unlock significant value and remains a re-rating candidate trading at 13x FY22E EBITDA. We maintain ‘buy/SP’ with SOTP-based revised target price of Rs 160 (FY22E EBITDA).