Fortis Healthcare - Balance sheet improving, valuations reasonable; upgrade to Hold - Anand Rathi
Results in line with estimates. Fortis Healthcare's (Fortis) revenue grew 154.5% yoy to Rs. 15.4bn, better than our expected Rs. 14.9bn. Its reported EBITDA margin declined 380bps yoy to 9.9% (versus our estimated 10.3%) on payment of service fees to Religare Health Trust (RHT). The company reported exceptional gain of Rs. 9.7bn, pertaining to gain on dilution of stake in RHT. Adjusting for this gain, the company reported net loss of Rs. 433m.
Healthy growth across segments. Strong revenue growth was largely driven by 20% increase in revenue from India hospitals business with improved EBITDA margin of 15.8%. Domestic diagnostics business (Super Religare Laboratories) grew 12% yoy with 370bps yoy improvement in EBITDA margin to 10.3% (down ~400bps qoq). International business revenue came at Rs. 8.2bn, up 6.4% qoq. EBITDA margin in international business sustained at ~13%.
Our take. We believe that inflow of cash from dilution of stake in RHT, divestment of Dental Corp. subsidiary by Mar'13 and issue of equity shares through the IPP route would help the company strengthen its balance sheet substantially by bringing down D/E level to 0.5x by FY14e. Further, the proportion of revenue from India business would move up to 70%+ from ~50% currently post divestment of Dental Corp., which would bring focus back to India. We maintain revenue estimates, but lower PAT marginally to factor in higher service fees to RHT, which could hit EBITDA. Management focus is currently on strengthening balance sheet and no M&A is expected in near future, which is a positive in our view.
The stock is currently trading at EV/EBITDA valuations of 13.5x FY14e and 10.8x FY15e. We upgrade the stock to Hold from Sell on improving balance sheet and reasonable valuations. We also raise our target price to Rs. 118 (earlier Rs. 110), based on 14x FY14e EBITDA and Rs. 21 for stake in RHT. Risks. Delay in execution of expansion projects and integration of international operations.
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