Fortis Healthcare - De-leveraging to play out; Hold - Anand Rathi

Key takeaways

Weak quarter. Fortis' 4QFY13 revenue grew 25.9% yoy to Rs. 16.1bn, more than our expected Rs. 15.2bn, led by higher growth in its international business. The reported EBITDA margin declined 550bps yoy to 7% (vs our estimated 9.2%) due to the commencement of costs pertaining to the business (Religare Health) trust and the commercialization of ~300 beds at the Gurgaon facility. The lower EBITDA margin coupled with higher interest cost resulted in the reported Rs. 1.16bn net loss (vs our estimated Rs. 16m net loss).

Revenue growth strong. The higher-than-expected revenue growth was led by a 30% yoy increase in revenue from international operations and an 18.4% growth in domestic operations. The domestic hospitals division reported 16.3% yoy growth in revenue (vs our estimated 18%) and the SRL business rose a strong 27% yoy. With a 39.3% yoy increase in revenue, Dental Corp Australia was the key growth driver in the international business, followed by Hoan My Vietnam with 34.9% revenue growth.

Our take. We believe the weak margin performance was chiefly due to the business trust costs and the commercialization of the Gurgaon facility. We believe that margins would gradually improve to 8.5% by FY15 (from 7% now) on the maturity of the hospital beds. To address its key concern, deleveraging its balance sheet, the company has taken various measures such as dilution of its stake in the Religare Health Trust, sale of the Dental Corp subsidiary, institutional placement programme, etc. Considering the less-thanexpected margins in 4QFY13 which would only gradually expand, we lower our FY14e and FY15e EBITDA respectively 8.2% and 8.1%. However, we raise revenue estimates 1.4% and 1.3%.

The stock trades at 17.5x FY14e and 14.1x FY15e EV/EBITDA. We maintain a Hold on it, with a revised target of Rs. 105 (earlier Rs. 118) based on 14x Sep'14 EBITDA and Rs. 15 a share for the stake in RHT. Risks. High gestation period and delay in commercialization of the new beds.

Source : Equity Bulls

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