Fortis Health: Ready for global journey, challenges remain
CRISIL Research has come out with its report on Fortis Healthcare (India). According to the research firm, the company is expected to face challenges given high debt and interest costs wiping out the entire operating profit. Asset turnover of the international business is low compared to peers.
December 14, 2012 / 13:23 IST
CRISIL Research has come out with its report on Fortis Healthcare (India). According to the research firm, the company is expected to face challenges given high debt and interest costs wiping out the entire operating profit. Asset turnover of the international business is low compared to peers.
Fortis, one of the leading healthcare service providers in India, has expanded into diverse healthcare segments in Asia-Pacific countries in the past one year through acquisitions of promoter-owned entities. Although the acquisition of the international business is expected to provide a head start in the growing economies, we expect Fortis to face a few hurdles on the way. It has used the proceeds from the listing of the business trust in Singapore to repay debt but interest coverage is expected to remain below 1.0x. The domestic hospital business has reported steady improvement while the diagnostic business has shaped up well in the recent past. We retain our fundamental grade of 3/5 for Fortis, indicating that its fundamentals are good relative to other listed securities in India.Going international; a head start in growing economies but with challenges
Acquisition of Fortis Healthcare International Pte Ltd (FHIL) in January 2012 is likely to provide a head start in growing economies and enhance its presence in diverse business segments such as dental care, primary care, diagnostics and healthcare services. However, we expect Fortis to face challenges given high debt and interest costs wiping out the entire operating profit. Asset turnover of the international business is low compared to peers. Also, goodwill on the acquisition of assets in Australia is significantly more than the capital expenditure required to set up the new assets.Hospital business reported steady performance; diagnostic business shaping up well
Average occupancy in the hospital business increased to 78% in Q2FY13 from 72% in FY11. Driven by a better mix and stable average length of stay (ALOS), average revenue per occupied bed (ARPOB) grew 12.4% y-o-y to Rs 27,671 in Q2FY13. The diagnostic business has shaped up well; revenues grew 9.5% and margin improved 220 bps q-o-q in Q2FY13 compared to flat growth and an average margin of 9.5% in FY12. This was driven by higher utilisation of the existing network.Business trust listing in Singapore to lower debt but interest coverage remains low
Fortis has raised Rs 22.4 bn through the IPO of the business trust in Singapore and used the proceeds to reduce debt by Rs 21 bn; hence, gearing is expected to improve to 1.1x in FY13 from 2.2x in FY12. However, savings from interest costs are expected to be offset by high service fees. As a result, interest coverage should remain low over the next two years.Revenues to grow at a two-year CAGR of 50% in FY14, RoCE to remain subdued
We expect revenues to more than double to Rs 67 bn by FY14 due to acquisition of the international business. We expect Fortis to turn profitable in FY14 after reporting a net loss of Rs 605 mn in FY13. RoCE is expected to remain subdued at 3.6% in FY14.Valuations - current market price is aligned
We retain our fair value of Rs 112 per share for Fortis. The hospital, diagnostic and international businesses are valued at Rs 98 per share based on discounted cash flow (DCF). At this value, implied EV/EBITDA is 11.5x FY14E EBITDA. Fortis’ 28% stake in the business trust is valued at Rs 14 per share based on the current market capitalisation. At the current the market price, our valuation grade is 3/5.To read the full report click on the attachmentDisclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"
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