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Fortis Healthcare Ltd
Neutral
FOHE.BO, FORH IN
Management meeting: Increasing focus on capital
efficiency
We recently met with Fortis management. Growth remains strong, and
recently started hospitals are scaling up rapidly. Fortis is pursuing an assetlight strategy that entails leasing real estate and managing hospitals. This
should help Fortis scale up at a faster pace and improve its capital return
profile. We are positive on the Fortis growth story, but we see the stock as
fairly valued at the current level. We see Rs120-125 as a good entry point.
• Rapid growth to continue: We estimate that Fortis will add about 1,450
new owned beds over the next two years, increasing its owned beds to 4,075
by FY13. We also expect a rapid scale-up in managed beds, aided by recent
deals that will add 500 beds over the next two years. We estimate a revenue
CAGR of 38.5% and an EPS CAGR of 55% over FY10-FY13.
• Gradual shift towards asset-light models: Fortis is increasing its focus on
operating facilities on management contracts/reverse management contracts
and public-private partnerships. It has recently signed seven such contracts,
where its capital investments will be limited only to medical equipment. We
believe that a shift towards such models will help Fortis scale up at a faster
pace and will improve its capital return profile.
• New additions to limit near-term margin expansion: We expect nearterm margin expansion to be limited due to rapid new room additions and a
shift towards rental models with relatively low operating margins (though
the return on capital employed should be higher). As a result, we cut our
FY11-FY13 EBITDA margin assumptions by 140bp-180bp, although we
still foresee a healthy margin range of 15%-17% over FY11-FY13.
• Price target, valuation, key risks: We decrease our FY11-FY13 EBITDA
estimates by 11%-14%, factoring in lower margins. We maintain our Neutral
rating on the stock and our PT of Rs160, rolled forward to Sep-11 and based
on 15x Sep-12E EV/EBITDA. Upside risks include value-accretive
acquisitions and early breakeven for new hospitals. Downside risks include
expensive acquisitions and delays in expansion plans.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fortis Healthcare Ltd
Neutral
FOHE.BO, FORH IN
Management meeting: Increasing focus on capital
efficiency
We recently met with Fortis management. Growth remains strong, and
recently started hospitals are scaling up rapidly. Fortis is pursuing an assetlight strategy that entails leasing real estate and managing hospitals. This
should help Fortis scale up at a faster pace and improve its capital return
profile. We are positive on the Fortis growth story, but we see the stock as
fairly valued at the current level. We see Rs120-125 as a good entry point.
• Rapid growth to continue: We estimate that Fortis will add about 1,450
new owned beds over the next two years, increasing its owned beds to 4,075
by FY13. We also expect a rapid scale-up in managed beds, aided by recent
deals that will add 500 beds over the next two years. We estimate a revenue
CAGR of 38.5% and an EPS CAGR of 55% over FY10-FY13.
• Gradual shift towards asset-light models: Fortis is increasing its focus on
operating facilities on management contracts/reverse management contracts
and public-private partnerships. It has recently signed seven such contracts,
where its capital investments will be limited only to medical equipment. We
believe that a shift towards such models will help Fortis scale up at a faster
pace and will improve its capital return profile.
• New additions to limit near-term margin expansion: We expect nearterm margin expansion to be limited due to rapid new room additions and a
shift towards rental models with relatively low operating margins (though
the return on capital employed should be higher). As a result, we cut our
FY11-FY13 EBITDA margin assumptions by 140bp-180bp, although we
still foresee a healthy margin range of 15%-17% over FY11-FY13.
• Price target, valuation, key risks: We decrease our FY11-FY13 EBITDA
estimates by 11%-14%, factoring in lower margins. We maintain our Neutral
rating on the stock and our PT of Rs160, rolled forward to Sep-11 and based
on 15x Sep-12E EV/EBITDA. Upside risks include value-accretive
acquisitions and early breakeven for new hospitals. Downside risks include
expensive acquisitions and delays in expansion plans.
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