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In a healthy state
We remain Overweight on the Healthcare sector, given
the demand-supply mismatch, good brand building
exercises by companies and robust long-term growth
potential. We retain our Buy rating on Apollo Hospitals
and a Hold on Fortis Healthcare. We believe both the
companies are well-positioned to capitalise on the
increasing demand for healthcare services, sound
business fundamentals and attractive valuations.
�� Sales growth to continue: We expect Apollo Hospitals
to report 30% YoY sales growth in Q4FY11 to
Rs6,278mn. Fortis Healthcare is expected to notch
higher growth of 21.6% YoY to Rs4,006mn.
�� Margins to improve: We expect the EBITDA margin of
Apollo Hospitals to inch up to 16.3%. We expect Fortis
Healthcare to report an EBITDA margin of 16.7%, up
220bp QoQ. In Q3FY11 Fortis had some one time
expenses related to the opening of the Shalimar Bagh
hospital in Delhi. The improvement would primarily be
driven by cost efficiencies and improving operating
leverage.
�� Profitability to grow: We expect Apollo Hospitals’ PAT
to grow by a healthy 55% YoY to Rs500mn and Fortis to
register 34% YoY increase to Rs 366mn.
�� Key points to watch: For Apollo Hospitals, the key
thing to watch out for will be EBIT margins of the
pharmacy segment. After reporting +ve EBIT margins in
Q2FY11 (0.3%), the company once again showed –ve
EBIT margins of 0.5% in Q3FY11. We believe the
company would achieve PAT breakeven by FY12. We
believe the operating performance of pharmacy
vertical would be a key factor in improving the overall
margins. According the last analyst’s presentation on
Fortis, the opening of its 900 bed green-field facility in
Gurgaon (phase 1 450 beds) was delayed by one
quarter to Q2FY12. Any further delay would impact our
estimates.
�� Valuations: We value Apollo Hospitals at 14x FY13E
EV/EBITDA to arrive at a price target of Rs653. We value
Fortis Healthcare at 15x FY13E EV/EBITDA to arrive at a
price target of Rs175.
Apollo Hospitals Enterprise (Buy; Target Price: Rs653)
�� We expect sales to grow to Rs6,278mn up 4.5% QoQ and 30% YoY. We expect the hospital
segment to grow 3.2% QoQ to Rs 4,414mn and pharmacy segment to grow 4.7% QoQ to Rs
1,814mn. We expect the company to close the year with 1,170 operational pharmacies. We
believe that contribution of pharmacy segment to the overall revenues would increase 29%
from 27% in Q3FY10.
�� We expect EBITDA to improve 8.2% QoQ and 55.0% YoY to Rs1,020mn. EBITDA margin is
expected to increase 60bps QoQ to 16.3%.
�� We expect the PAT to grow 9.0% QoQ and 55.6% YoY to Rs500mn. PAT margins are expected to
marginally increase by 40bps QoQ at 8.0%.
�� The key thing to watch out for is the performance of the pharmacy segment. The pharmacy
segment achieved EBIT breakeven (0.3%) for the first time in Q2FY11 but slipped back into red
in Q3FY11 reporting EBIT margins of –ve 0.5%. We believe the company would be able to
achieve a PAT break even by FY12E. If the company can convincingly better its performance
then it will definitely be a key positive and lead overall improvement in margins.
�� Also to watch out for would be the commissioning of ~150 bed facility in Secunderabad. The
company has finalized plans for raising money through a QIP for the next round of green-field
expansion. The management commentary on this would be something to watch out for.
�� The stock currently trades at 10.4x FY13E EV/EBITDA and Rs11.6mn FY13E EV/Adjusted Bed.
�� We have a Buy rating on the stock with a target price of Rs653, valuing the stock at 14x FY13E
EV/EBITDA. The implied EV/Adjusted Bed is Rs15.6mn
Fortis Healthcare (Hold; Target Price: Rs175)
�� We expect consolidated net sales to grow by 7.9% QoQ and 21.6% YoY to Rs4,006mn
�� We expect EBITDA at Rs 667mn, up 42% YoY and 23.8% QoQ. The jump in QoQ numbers is
because Q3FY11 had some one time expenses related to the commissioning of the 350-bed
Shalimar Bagh facility.
�� EBITDA margin will expand 220bp QoQ and 250bps YoY to 16.7% due to increasing cost
efficiencies and higher operating leverage.
�� We expect PAT to grow 34.6% YoY and 6.1% QoQ to Rs334mn with PAT margin at 9.1%.
�� The key things to watch out for are the performance of the recently commissioned Shalimar
Bagh Hospital (350 beds), Delhi and Kolkatta Hospitals (414 beds). These two hospitals had
begun operations at the fag end of Q2FY11. Hence, the operational performance of these
facilities will shed light on Fortis’s ability to successfully run new green-field facilities as till date
Fortis has majorly grown inorganically. Also, the progress on the Gurgaon green-field project
and other new projects should be monitored.
�� We downgrade the rating to Hold from Buy as the stock has moved up10% from our last update
on 9th February 2011. We have a target price of Rs175, valuing the stock at 15x FY13E EV/EBITDA
thus giving potential upside of 8.2%. The implied EV/Bed translates into Rs16mn. The stock
currently trades 13.8x FY1EE EV/EBITDA and Rs 12.3mn FY13E EV/Adjusted Bed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In a healthy state
We remain Overweight on the Healthcare sector, given
the demand-supply mismatch, good brand building
exercises by companies and robust long-term growth
potential. We retain our Buy rating on Apollo Hospitals
and a Hold on Fortis Healthcare. We believe both the
companies are well-positioned to capitalise on the
increasing demand for healthcare services, sound
business fundamentals and attractive valuations.
�� Sales growth to continue: We expect Apollo Hospitals
to report 30% YoY sales growth in Q4FY11 to
Rs6,278mn. Fortis Healthcare is expected to notch
higher growth of 21.6% YoY to Rs4,006mn.
�� Margins to improve: We expect the EBITDA margin of
Apollo Hospitals to inch up to 16.3%. We expect Fortis
Healthcare to report an EBITDA margin of 16.7%, up
220bp QoQ. In Q3FY11 Fortis had some one time
expenses related to the opening of the Shalimar Bagh
hospital in Delhi. The improvement would primarily be
driven by cost efficiencies and improving operating
leverage.
�� Profitability to grow: We expect Apollo Hospitals’ PAT
to grow by a healthy 55% YoY to Rs500mn and Fortis to
register 34% YoY increase to Rs 366mn.
�� Key points to watch: For Apollo Hospitals, the key
thing to watch out for will be EBIT margins of the
pharmacy segment. After reporting +ve EBIT margins in
Q2FY11 (0.3%), the company once again showed –ve
EBIT margins of 0.5% in Q3FY11. We believe the
company would achieve PAT breakeven by FY12. We
believe the operating performance of pharmacy
vertical would be a key factor in improving the overall
margins. According the last analyst’s presentation on
Fortis, the opening of its 900 bed green-field facility in
Gurgaon (phase 1 450 beds) was delayed by one
quarter to Q2FY12. Any further delay would impact our
estimates.
�� Valuations: We value Apollo Hospitals at 14x FY13E
EV/EBITDA to arrive at a price target of Rs653. We value
Fortis Healthcare at 15x FY13E EV/EBITDA to arrive at a
price target of Rs175.
Apollo Hospitals Enterprise (Buy; Target Price: Rs653)
�� We expect sales to grow to Rs6,278mn up 4.5% QoQ and 30% YoY. We expect the hospital
segment to grow 3.2% QoQ to Rs 4,414mn and pharmacy segment to grow 4.7% QoQ to Rs
1,814mn. We expect the company to close the year with 1,170 operational pharmacies. We
believe that contribution of pharmacy segment to the overall revenues would increase 29%
from 27% in Q3FY10.
�� We expect EBITDA to improve 8.2% QoQ and 55.0% YoY to Rs1,020mn. EBITDA margin is
expected to increase 60bps QoQ to 16.3%.
�� We expect the PAT to grow 9.0% QoQ and 55.6% YoY to Rs500mn. PAT margins are expected to
marginally increase by 40bps QoQ at 8.0%.
�� The key thing to watch out for is the performance of the pharmacy segment. The pharmacy
segment achieved EBIT breakeven (0.3%) for the first time in Q2FY11 but slipped back into red
in Q3FY11 reporting EBIT margins of –ve 0.5%. We believe the company would be able to
achieve a PAT break even by FY12E. If the company can convincingly better its performance
then it will definitely be a key positive and lead overall improvement in margins.
�� Also to watch out for would be the commissioning of ~150 bed facility in Secunderabad. The
company has finalized plans for raising money through a QIP for the next round of green-field
expansion. The management commentary on this would be something to watch out for.
�� The stock currently trades at 10.4x FY13E EV/EBITDA and Rs11.6mn FY13E EV/Adjusted Bed.
�� We have a Buy rating on the stock with a target price of Rs653, valuing the stock at 14x FY13E
EV/EBITDA. The implied EV/Adjusted Bed is Rs15.6mn
Fortis Healthcare (Hold; Target Price: Rs175)
�� We expect consolidated net sales to grow by 7.9% QoQ and 21.6% YoY to Rs4,006mn
�� We expect EBITDA at Rs 667mn, up 42% YoY and 23.8% QoQ. The jump in QoQ numbers is
because Q3FY11 had some one time expenses related to the commissioning of the 350-bed
Shalimar Bagh facility.
�� EBITDA margin will expand 220bp QoQ and 250bps YoY to 16.7% due to increasing cost
efficiencies and higher operating leverage.
�� We expect PAT to grow 34.6% YoY and 6.1% QoQ to Rs334mn with PAT margin at 9.1%.
�� The key things to watch out for are the performance of the recently commissioned Shalimar
Bagh Hospital (350 beds), Delhi and Kolkatta Hospitals (414 beds). These two hospitals had
begun operations at the fag end of Q2FY11. Hence, the operational performance of these
facilities will shed light on Fortis’s ability to successfully run new green-field facilities as till date
Fortis has majorly grown inorganically. Also, the progress on the Gurgaon green-field project
and other new projects should be monitored.
�� We downgrade the rating to Hold from Buy as the stock has moved up10% from our last update
on 9th February 2011. We have a target price of Rs175, valuing the stock at 15x FY13E EV/EBITDA
thus giving potential upside of 8.2%. The implied EV/Bed translates into Rs16mn. The stock
currently trades 13.8x FY1EE EV/EBITDA and Rs 12.3mn FY13E EV/Adjusted Bed.
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