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Fortis Healthcare
Pricey and worth it
Event
We initiate coverage on Fortis Healthcare (FORH IN) with an Outperform
rating and a TP of Rs180. Fortis’s proven proficiency in quickly turning around
acquisitions and ramping up green-field expansions makes it a compelling
investment, in our view. Growth in the past decade has been driven by the
addition of beds through acquisitions; going forward, we believe growth will be
driven by asset-light Greenfield projects, and this should improve return ratios.
Impact
Leveraging healthcare growth: Fortis, with 4,646 owned and 1,796
managed beds (of which ~3950 are operational) is well-placed to capitalise on
the structural shifts that we believe will benefit private players in healthcare.
Presence in high-margin speciality care and maturing beds should help drive
profitable growth. Despite significant bed additions, operational parameters
improved significantly with occupancy now at 72% (from 63% in FY08), ALOS
at 3.7 (from 4.3 in FY08) and ARPOB at Rs8.1m (from Rs7.6m in FY08).
Turnaround specialist: Fortis has a robust track record in acquisitions, with>
50% of its current bed capacity coming from acquired facilities. A standardised
and quality-driven business model backed by a premium brand helps Fortis
derive cost and revenue synergy and thereby turn around acquired facilities.
Focus on asset-light model: For future growth in the highly capital-intensive
healthcare business, Fortis is adopting an asset-light model, to reduce strain
on its balance sheet and to improve its return ratios despite aggressive bed
additions. Greater than seventy percent of planned bed additions in the
pipeline (~3,300 beds) would be by way of leased facilities.
SRL a synergistic buy: Fortis recently acquired a 71.4% stake in SRL for
Rs8bn. The acquisition is value-accretive, in our view, and would help
transform it into an integrated healthcare provider. SRL is a good fit, given
geographical complementarities (fast access to tier II and III cities) and a large
patient pool, as 25% of its lab testing is followed by hospital admissions.
Earnings and target price revision
Initiating coverage with Outperform rating and TP of Rs180.
Price catalyst
12-month price target: Rs180.00 based on an EV/EBITDA methodology.
Catalyst: 1) SRL synergy upside 2) Maturing beds
Action and recommendation
We value Fortis at 16x FY13E EV/EBITDA, at a relative premium to its global
peers but in line with the stock’s historical mean. Fortis is at an early phase in
its growth cycle (we estimate 39% revenue and 45% EBITDA CAGR over
FY11–14) and we believe the premium valuations will sustain. Fortis, with its
size and strong brand-equity, is well positioned to capitalise on the significant
opportunity in India’s fast-growing healthcare industry.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Fortis Healthcare
Pricey and worth it
Event
We initiate coverage on Fortis Healthcare (FORH IN) with an Outperform
rating and a TP of Rs180. Fortis’s proven proficiency in quickly turning around
acquisitions and ramping up green-field expansions makes it a compelling
investment, in our view. Growth in the past decade has been driven by the
addition of beds through acquisitions; going forward, we believe growth will be
driven by asset-light Greenfield projects, and this should improve return ratios.
Impact
Leveraging healthcare growth: Fortis, with 4,646 owned and 1,796
managed beds (of which ~3950 are operational) is well-placed to capitalise on
the structural shifts that we believe will benefit private players in healthcare.
Presence in high-margin speciality care and maturing beds should help drive
profitable growth. Despite significant bed additions, operational parameters
improved significantly with occupancy now at 72% (from 63% in FY08), ALOS
at 3.7 (from 4.3 in FY08) and ARPOB at Rs8.1m (from Rs7.6m in FY08).
Turnaround specialist: Fortis has a robust track record in acquisitions, with>
50% of its current bed capacity coming from acquired facilities. A standardised
and quality-driven business model backed by a premium brand helps Fortis
derive cost and revenue synergy and thereby turn around acquired facilities.
Focus on asset-light model: For future growth in the highly capital-intensive
healthcare business, Fortis is adopting an asset-light model, to reduce strain
on its balance sheet and to improve its return ratios despite aggressive bed
additions. Greater than seventy percent of planned bed additions in the
pipeline (~3,300 beds) would be by way of leased facilities.
SRL a synergistic buy: Fortis recently acquired a 71.4% stake in SRL for
Rs8bn. The acquisition is value-accretive, in our view, and would help
transform it into an integrated healthcare provider. SRL is a good fit, given
geographical complementarities (fast access to tier II and III cities) and a large
patient pool, as 25% of its lab testing is followed by hospital admissions.
Earnings and target price revision
Initiating coverage with Outperform rating and TP of Rs180.
Price catalyst
12-month price target: Rs180.00 based on an EV/EBITDA methodology.
Catalyst: 1) SRL synergy upside 2) Maturing beds
Action and recommendation
We value Fortis at 16x FY13E EV/EBITDA, at a relative premium to its global
peers but in line with the stock’s historical mean. Fortis is at an early phase in
its growth cycle (we estimate 39% revenue and 45% EBITDA CAGR over
FY11–14) and we believe the premium valuations will sustain. Fortis, with its
size and strong brand-equity, is well positioned to capitalise on the significant
opportunity in India’s fast-growing healthcare industry.
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