Buy Fortis Healthcare; target of Rs 365: Prabhudas Lilladher

Prabhudas Lilladher's research report on Fortis Healthcare

Fortis Healthcare (FORH) has signed a definitive agreement for sale of its hospital business operations at Vadapalani, Chennai to Sri Kauvery Medical Care Limited on slump sale basis for Rs1.52bn. While transaction will be margin accretive by ~70bps, divestment of Arcot Road unit is in-line with the stated intent of optimizing hospital assets. We remain positive on margin improvement in hospital segment aided by 1) improving case and payor mix 2) cost rationalization initiatives and 3) divestment of non-profitable assets. Our FY24E and FY25E EBIDTA stands increased by ~2% as we factor in the divestment. We expect 18% Pre IND AS EBIDTA CAGR over FY23-25E.

Outlook

At CMP, stock is trading at 17.5x EV/EBIDTA on FY25E, adjusted for SRL stake which is at 20-25% discount to its peers. Maintain ‘Buy’ rating with revised TP of Rs.365 (earlier Rs. 330) valuing hospital segment at 20x (18x earlier) and Diagnostic business at 18x EV/EBIDTA on FY25E. Resolution of legal issues and further monetization of non-profitable assets would be a key additional trigger for re-rating.

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