Fortis Healthcare - Strong recovery continues - ICICI Securities

Fortis Healthcare (FHL) reported Q4FY21 performance better than estimates driven by business recovery across hospitals & diagnostics and continued focus on cost optimisation. We expect the performance improvement to continue in coming quarters and estimate strong growth in FY22E. Revenue grew 12.5% YoY to Rs12.5bn (I-Sec: Rs11.8bn) with hospitals growing 7.5% and SRL (diagnostics) growing 35.4%. EBITDA margin improved 450bps YoY but dropped 40bps QoQ. Management has taken steps to reduce personnel and S,G&A costs and the benefits are visible from last few quarters. We remain positive on growth recovery, cost optimisation efforts and potential operating leverage outlook. Vaccines administration would provide additional upside. Upgrade to BUY.

- Revenue recovery strong: Revenue grew 12.5% YoY with a growth of 7.5% in hospitals revenue during the quarter. This growth was primarily driven by better ARPOB and recovery in non-COVID beds. The recovery has begun and we expect the occupancy to remain above 65% in coming quarters. Fortis will add 1,300 beds in existing hospitals over next few years which would add revenue growth. SRL business grew 35.4% driven by ~17% contribution from COVID-19 tests and non-COVID business grew 12.4% on a low base. We estimate positive growth in non-COVID diagnostics business to continue and expect a strong 39.9% growth in FY22E including acquisition of DDRC, Kerala. This acquisition will also help in improving B2C mix.

- Cost optimisation initiatives to continue: EBITDA margin in Q4FY21 was at 15.8%, down 40bps QoQ mainly due to revenue mix. However, it was up 450bps YoY driven by visible benefits of cost optimisation efforts and revenue recovery as estimated. The company has taken various cost control measures to reduce personnel and S,G&A expenses and full benefits are yet to accrue. We believe the cost control measures along with gradual revenue growth recovery would help in improving EBITDA margin by 780bps over FY21-FY23E to 17.8%.

- Outlook: We raise revenue/EBITDA estimates by 3-6%/6-9% for FY22E-FY23E to factor in better ARPOB and increase in number of beds. We believe base business has normalised and estimate revenue and EBITDA CAGRs at 24.1% and 65.0% respectively over FY21-FY23E. Supreme Court judgement on the pending open offer by IHH is still awaited. Fortis is administering all the approved three vaccines currently with a monthly capacity of administering 6lac doses (which can be easily doubled). The vaccine inoculation drive can provide upside to our estimates.

- Valuations and risks: We upgrade the stock to BUY from Add considering healthy margin recovery and potential upside from vaccines. We raise our target price to Rs268/share based on EV/EBITDA of 18x hospital, 24x SRL on FY23E EBITDA and Rs25/share for vaccines opportunity (earlier Rs190/share). Key downside risk: ongoing regulatory concerns and delay in margin recovery.

Shares of FORTIS HEALTHCARE LTD. was last trading in BSE at Rs.230.05 as compared to the previous close of Rs. 227.6. The total number of shares traded during the day was 141229 in over 1825 trades.

The stock hit an intraday high of Rs. 233.15 and intraday low of 227.3. The net turnover during the day was Rs. 32497809.

Source : Equity Bulls

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