Buy Fortis Healthcare; target of Rs 220: Motilal Oswal

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Motilal Oswal's research report on Fortis Healthcare

Sales increased 3.2% YoY to INR11.6b, missing our estimate of INR12.2b, due to the impact of demonetization and stent price control. EBITDA rose 38% YoY to INR861m (est. of INR941b), with the margin at 7.4% (v/s est. of 7.7% and 5.6% in 1QFY17). Adj. PAT increased 41.1% YoY to INR228m. Demonetization and stent price control impacted numbers: Hospital revenue rose 3% YoY/QoQ to INR9.4b. EBIDTAC stood at INR1.3b, with the margin at 13.5% (+150bp QoQ, -170bp YoY). Occupancy levels stood at ~71% v/s 70% in 4QFY17 and 74% in 1QFY17. Diagnostic EBITDA margin contracted 400bp YoY (-130bp QoQ) to 18.4%, led by pricing pressure, high marketing expense and change in business mix. Stent price control continued to impact Hospital growth. FORH expects sequential improvement in 2Q, with strong double-digit growth in 2H, as the impact of stent pricing and demonetization will be in the base.

Outlook

Top pick in healthcare delivery space: The stock has remained volatile in recent past due to news flow related to possibility of promoter change and equity infusion in FORH. 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 FHTL transaction. We value Hospital and Diagnostic based on 20x FY19E EV/EBITDA. We lower TP multiple for Diagnostic to 20x from 25x, expecting relatively slow margin expansion in the medium term. FORH is our top pick in healthcare delivery space with TP of INR220 (v/s INR240 earlier). We cut EBITDA by 3%/4% for FY18/19E as we build in the impact of stent price control and pricing pressure in Diagnostic.

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