Fortis Healthcare Ltd (FHL), the only other listed healthcare
services play in India, is available at a steep discount –
12x FY14E EV/EBIDTA vs. average 15x FY14E EV/EBIDTA
for Asian peers
Substantial discount to peers is due to
High debt incurred on account of rapid expansion in the
last 5 years
Critical scale achieved. Benefits to accrue from
De-leveraging
Slowing capex intensity
We believe the valuation discount is set to narrow led by
(1) debt equity of 1x in FY14E from 1.6x in FY12 due to Rs
20 bn raised by transferring clinical establishments to
Religare Health Trust (RHT) and (2) lower capex intensity
as future bed additions in India will be based on asset light
model
We initiate coverage with BUY rating and DCF-based
target price of Rs 152 (implies 14x FY14E EV/EBIDTA) --
39% upside potential from CMP of Rs 109
Our key assumptions are Fortis will consolidate and grow from internal accruals over FY12-18
India hospital business to ramp up operational beds to 6,700 (at ~600 beds pa) from 3,000 beds in FY12
India hospital margin to scale up to ~16% from 13% in FY12 due to higher proportion of mature beds (>5 yrs)
20% CAGR in SRL revenue coupled with EBIDTA margin improvement to 20% (15% in FY13E) due to operating
leverage kicking in
International operations growing at steady pace of 8-10% with stable margin
Valuation likely to catch up
While Apollo Hospitals has created scale organically over last 3 decades, Fortis has largely been scaled up through
acquisitions over the last decade
Both the brands are strong and well accepted among patients and medical fraternity. However, acquisition-led
growth has resulted in lower capital efficiency for Fortis
With Fortis planning to consolidate business and deleverage balance sheet, we believe valuation gap will narrow
We see secular growth in Healthcare services in India due extreme under-penetration. Within this space, brand
‘Fortis’ and ‘SRL’ are among the Top 3 in India and well accepted among patients and medical fraternity
Fortis has built scale (difficult to replicate) in less than a decade. It has not only demonstrated ability to acquire best
in class scarce domestic assets cheap (bed acquisitions done at ~ Rs.5 mn/bed in metros vs. > Rs 10 mn cost for
greenfield) but also displayed ability to scale up operations (matured beds, 5+ years, have over 75% occupancy and
24% EBIDTA margin)
SRL has 48% market share in organized diagnostics space in India, which has 20-25% CAGR over last 5 years. With
most lab rollouts behind, the margin is on an uptrend (15% in FY13 vs. 9% in FY11). We believe the business could
be a valuation game changer if FHL decides to unlock value (comparable deal multiples over 2.5-3x price/sales)
55% consolidated revenue and 35% EBIDTA CAGR to Rs 73 bn and Rs 7 bn over FY12-14E
India operations (50% of revenue)
Second largest hospital player in India with ~3,000 owned operational beds in FY12 (3x over FY08). We expect 25%
revenue CAGR over FY12-14E led by 1,400 beds additions
20% CAGR in SRL revenue to Rs 8 bn in FY14E with higher profitability. EBIDTA margin has been on an uptrend
(15% currently vs. 9.5 % in Q1FY12). We believe there is headroom for margin to grow as labs have already been
rolled out
International operations (50% of revenue)
Stable business with low capital intensity; to post 15% CAGR over FY12-14E with steady margin
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