Following a management meet with Fortis Healthcare (FH) we believe
that near- to mid-term pain persists due to a stretched balance sheet
and lower margins in SRL (Super Religare Laboratories). FH has been
affected by uncertainty following its acquisition of Fortis Healthcare
International (FHI) and its resulting stretched balance sheet. The
India hospitals business should continue strong growth led by huge
demand. We maintain a Sell with a target price of `102.
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Momentum continues in the domestic hospitals segment. FH’s
Indian hospitals segment continues to do well and expects to add more
than 600 operational beds in FY13 on a base of ~2,900 beds at the end of
FY12. We expect 22.4% CAGR revenue over FY12-15. We have assumed
10% increase in ARPOB (average revenue per operating bed) and gradual
increase in occupancy levels.
SRL suffering from lower profitability. SRL has been reporting ~7%
EBITDA margin from the past two quarters vs. ~15% earlier due to the
commencement of three large labs in Kolkata, Bangalore and Delhi and
high rental cost at existing labs. The management expects a double-digit
margin in FY13. However, we expect recovery to be gradual, with
double-digit margin in FY14.
Stretched balance sheet. FH has a significantly higher net debt, of
US$1.3bn, translating to an FY12 debt-equity of 2.1x. Further, goodwill
on the consolidation/acquisition, at `64.8bn, is very high, amounting to
half the company’s assets. The company is taking various steps to
improve the situation, such as equity dilution in SRL and potential listing
of its Clinical Establishment division on the Singapore Exchange.
Valuation. We maintain a Sell with a price target of `102, based on 15x
FH EBITDA and 12x FHI EBITDA. Risk: Equity raising at premium
valuations.
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