Fortis Healthcare - COVID-19 impacted performance; focus on cost control - ICICI Securities

Fortis Healthcare (FHL) reported weak Q1FY21 performance as it was impacted by lockdown across the country. We expect the performance to gradually improve hereon as recovery was visible in June-July'20 in terms of occupancy and pathology tests. We believe normalisation is likely to happen in H2FY21. Revenue declined 46.8% YoY to Rs6.1bn with hospitals declining 46.5% and SRL (diagnostics) dropping 47.8%. This led to negative EBITDA margin of 17.0% (I-Sec: 12.0%) despite meaningful cost control on S,G&A front. We expect gradual operational improvement in terms of occupancy and ARPOB at hospitals with EBITDA margin expansion in hospitals and diagnostics led by cost rationalisation and operating leverage. Management has also taken various steps to reduce costs further by pruning personnel cost. Maintain BUY.

- Revenue impacted by lockdown: Revenue decline stood at 46.8% YoY, due to 47.8% drop in SRL revenue and 46.5% decline in hospital revenue. The decline is primarily attributed to the lockdown which affected the hospitals and diagnostics businesses negatively. The occupancy was down to 37% in Q1FY21 vs 66% YoY and 65% QoQ. COVID-19 treatments and tests contributed ~8% and ~29% of hospitals and diagnostic revenue respectively. Fortis has allocated 1,260 beds for COVID-19 treatment. The occupancy has improved from 29% in Apr'20 to 51% in July'20. We expect Fortis to witness 5.3% decline in consolidated revenue in FY21E due to COVID-19.

- Focus on cost control: EBITDA margin was at negative 17.0%, 500bps bps lower vs our estimate, due to lower revenue. However, management continues to focus on cost control and has taken various steps to reduce fixed hospital personnel cost which is visible in Q1FY21. Further, S,G&A expenses were down 31% YoY, partially driven by several steps of cost control initiatives taken in diagnostic business as well to reduce operating costs. We believe these cost control measures would help in improving EBITDA margin in FY22E by 230bps over FY20.

- Outlook: The new management has been focusing on stabilising the operations and cost rationalisation, which started bearing fruits but COVID-19 impacted the business temporarily. We expect business to normalise in H2FY21 and estimate revenue, EBITDA and PAT CAGRs at 6.5%, 15.6% and 78.8% respectively over FY20-FY22E. Supreme Court judgement on the pending open offer (at Rs170/share) by IHH is still awaited.

- Valuations and risks: We lower revenue/EBITDA estimates by 4.0/16.7% for FY21E and largely maintain FY22E estimates. Maintain BUY with revised target of Rs160/share based on EV/EBITDA of 16x hospital business and 18x SRL on FY22E EBITDA (earlier Rs155/share). Key downside risks to our call are: ongoing regulatory concerns and delay in margin recovery.

Shares of FORTIS HEALTHCARE LTD. was last trading in BSE at Rs.135.5 as compared to the previous close of Rs. 135.8. The total number of shares traded during the day was 62335 in over 1456 trades.

The stock hit an intraday high of Rs. 136.45 and intraday low of 133.45. The net turnover during the day was Rs. 8394214.

Source : Equity Bulls

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