Analysts remain positive on Fortis Healthcare, expect up to 38% upside in stock price

But the management expects margin trajectory to improve towards the end of year, as growth picks up and fixed costs get absorbed. It expects double digit growth in second half of FY18 and EBITDAC margin to expand to 16 percent (13.3 percent in Q1FY18) by year end.

Fortis reiterated focus on brown-field expansion, cost management and clinical excellence. They are also confident of improving SRL margins post the temporary blip in Q1FY18.

Axis Capital expects around 35 percent EBIDTA CAGR over FY17-19 on SRL's (20 percent of revenue) margin expansion as labs mature, higher volume as marketing pays off and operating leverage kicks in; hospital division's (80 percent of revenue) continued brownfield expansion of hospital beds & beds maturing should improve EBITDAC margin by around 100 bps at 16 percent in FY19; service fee plateauing; and increase in procedure prices to counter regulated stent prices.

Motilal Oswal is bullish on the stock, saying it is a top pick in healthcare delivery space but slashed target price to Rs 220 (from Rs 240 earlier), expecting relatively slow margin expansion in the medium term.

The research house cut EBITDA by 3/4 percent for FY18/19 as it built in the impact of stent price control and pricing pressure in diagnostic.

"The stock has remained volatile in recent past due to news flow related to possibility of promoter change and equity infusion in Fortis Healthcare. These events can help prepone value unlocking in the stock, but, regardless of this event, we argue for multiple re-rating led by multifold increase in Hospital EBITDA, SRL demerger, asset light expansion strategy and Fortis Hospitals (FHTL) transaction," Motilal Oswal said.

Consolidated net profit in Q1 fell 66 percent year-on-year to Rs 5.5 crore due to forex & exceptional loss and higher tax expenses and finance cost.

Revenue grew by 3.2 percent to Rs 1,156.6 crore in Q1 while operating profit jumped 37.5 percent to Rs 86.1 crore and margin expanded by 190 basis points to 7.5 percent.

Revenue of hospital business (82 percent of total) grew 3 percent, despite being impacted by price control on stents and demonetisation. While occupancy declined YoY due to high base (71 percent versus 74 percent in Q1FY17), average revenue per occupied bed grew 3 percent YoY. EBITDA grew 38 percent benefiting from lower Business Trust fee post the Fortis Hospitals transaction.

Diagnostic business (18 percent of total) grew 10 percent YoY, driven by higher volumes, but margins remained under pressure due to product mix, higher promotion spends (around 20 percent higher) and staff cost. Interest cost jumped 53 percent YoY due to 100 percent consolidation of Fortis Hospitals' compulsorily convertible debentures and transaction related borrowings.

While maintaining buy rating on Fortis Healthcare with a target price of Rs 230, Edelweiss said it believes Fortis is at the cusp of unlocking significant value by demerging its 56 percent subsidiary SRL (can unlock Rs 53 per share).

The stock has corrected by 25 percent in the last 1 quarter hit by leverage issue at promoter’s end. It is now trading at 13.4x FY19 EBITDAC versus average sector multiple of 18x, it feels.

Meanwhile, the board of directors of the company gave in-principle approval to raise up to Rs 5,000 crore.

At 13:16 hours IST, the stock price was quoting at Rs 164.45, down Rs 1.50, or 0.90 percent on the BSE.

Posted by Sunil Shankar Matkar