Fortis Healthcare - Balance sheet remains stretched; Sell - Anand Rathi

In line with our estimates were Fortis Healthcare's reported 1QFY13 sales and EBITDA. Its net profit, however, came lower than we estimated due to more-than-expected interest outgo and higher tax. We are negative regarding the stock due to a highly stretched balance sheet with net debt to equity of 1.6x. The interest cost would erode most of the EBITDA, resulting in a subdued bottom line. We maintain a Sell, with a target of Rs.102.

- Stretched balance sheet, the key concern. On the Fortis Healthcare International (FHI) consolidation, FH has a significantly higher net debt, of US$1.25bn, translating to an FY13e debt-equity of 2x. We believe that the high debt (and consequent interest cost) would erode more than half of FH's EBITDA. Further, goodwill on the consolidation/acquisition, at Rs.69.1bn, is very high, amounting to half the assets.

- Momentum continues in the domestic hospitals segment. FH's Indian hospitals segment did well in 1QFY13, growing 26% yoy, with a 13.1% EBITDA margin. The company expects to add more than 600 operational beds in FY13, and we expect a 22.4% CAGR in revenue over FY12-15. Revenues of the subsidiary, Super Religare Labs grew 119% yoy with a 13.9% EBITDA margin (from 7% in 4QFY12).

- International business. At Rs.7.4bn, the international business brought in 53% of consolidated revenue. EBITDA grew 17% to Rs.920 m. The EBITDA margin inched up to 12.4% (12.3% in 4QFY12). The growth was driven by all the international subsidiaries. However, debt raised to acquire international operations would continue to weigh on the bottom line for a prolonged period.

- Valuation. We maintain a Sell, with a target of Rs.102, based on 15x FH EBITDA and 12x FHI EBITDA. Risk: equity-fund raising at premium valuations.

Source : Equity Bulls

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