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Fortis Healthcare (FOHE.BO)
Alert: Takeaways from India Pharma Conf., Dec. 6-7
Takeaways from Mumbai — Fortis Healthcare presented at our India Pharma MiniConference in Mumbai. Below are key takeaways.
Aiming for leadership in India — Currently Fortis has only a c0.5% share of the
total cUS$46bn Indian healthcare market - management believes there is
significant opportunity for growth. The market is highly fragmented, with 85% of
the hospitals having less than 30 beds and <1% of hospitals having more than
200 beds. Fortis aspires to garner 4-5% market share in the next 8-10 years
through a combination of greenfield, expansion & inorganic opportunities.
Expansion Plans — Fortis currently has c3,500 operational beds, 2,000 of which
are owned and 1,500 are managed. Currently 2,000 beds are under project stage
and another 2,500 beds will be added in the next 2-3 years. Fortis Healthcare will
drive expansion plans in India, while the group entity (Fortis Global Healthcare)
will look at global expansion. Synergies between the two entities would be explored
at a later stage.
Medical tourism, a large opportunity — as costs are much lower in India and
waiting times are manageable. Lower infrastructure and manpower costs, more
efficient doctors (more surgeries) and affordability have resulted in lower surgery
costs. Fortis has started seeing traction from medical tourism patients and expects
three times revenues (6-7% of sales) in FY11 as compared to FY10.
Other key takeaways — 1) Although ROCE on an overall basis is only 8% (target
26%), the older hospitals have started delivering ROCEs of 20%+; 2) Integration of
acquired Wockhardt hospitals is complete and the company should start deriving
benefits in the coming quarters; 3) The average cost of setting up additional bed
capacity ranges from Rs 60m/bed in a tier-II/tier-III city to Rs 100m/bed in a tier-I
city; 4) The company is looking at asset-light strategies, including leasing of land,
equipment, etc; 5) Acquiring and retaining talent is a big challenge due to a
scarcity of skilled manpower.
Maintain Buy — as we believe healthcare delivery is a structural growth story in
India and Fortis is one of the well positioned companies to benefit.
Fortis Healthcare
Valuation
Our target price for Fortis is Rs190. We prefer to use EV/EBIDTA versus EBIDTA
CAGR as the primary method to value the company. We believe that hospital
companies in India would have a predictable and steady revenue stream, given
high unmet demand and low but growing penetration of organized healthcare.
However, given that these companies are still in an investment phase, we believe
EBIDTA provides a much better reflection of the operating profitability of the
business at this point. Fortis has only one directly comparable company listed on
the Indian market - Apollo Hospitals. We value Fortis at a slight premium to
Apollo, at 16x EBITDA (vs 15x for Apollo) as we believe Fortis' greater scale &
geographical diversification post the WHL hospitals acquisition merit a higher
multiple. Our current EV/EBIDTA multiple of 16x is also in the range that Fortis
has traded over the last several years. At 16x Mar'12E EBITDA we arrive at a
target price of Rs190.
Risks
Our risk rating for Fortis is Low Risk as suggested by our quants-based rating
system, which tracks 260-day historical share price volatility. Key upside risks that
could prevent the stock from achieving our rating and target price include: (1)
Faster than expected ramp up in occupancy rates, especially in Escorts, could
lead to the company beating our earnings estimates; (2) Better than expected
performance of the WHL acquisition, could change the outlook for the stock; (3)
Any progress on Fortis' plan to unlock value in its land holding could also trigger
an upward move in the stock price.
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