PL Stock Report - Fortis Healthcare (FORH IN) - Event Update - Divest 200 beds loss making Arcot unit - BUY
Fortis Healthcare (FORH IN) - Param Desai - Senior Research Analyst, Prabhudas Lilladher Pvt Ltd
Rating: BUY | CMP: Rs309 | TP: Rs365
Event Update - Divest 200 beds loss making Arcot unit
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.
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.
♦ Contours of the transaction: The transaction will be an all cash deal estimated to be completed by end of July 2023. The unit currently has 110 operational beds with a potential to scale up to nearly 200 beds. The unit is on a leased premises commissioned in October 2020. FORH have sold unit at Rs7.6mn per bed. Typically cost/bed in metros is Rs15mn/bed which includes land cost also.
♦ Margin accretive: The unit reported Rs512mn revenues and EBIDTA loss of Rs360mn in FY23. Management stated that they have spent ~Rs2.2bn to commercialize this unit. Despite 3 years of operations, hospital was still loss marking given ongoing infrastructure creating bottleneck for patient’s inflow. We see monetization of Arcot road asset as positive that could lead to margin improvement by 70bps in hospital segment.
♦ Brownfield expansion & margin improvement to drive hospital business: FORH’s brownfield expansion plan of 1,300-1,400 beds over next 4-5 years continues to be on track. This would result in better operating leverage as capacity ramps up in units which continues to enjoy higher occupancy. Management guided margin improvement of 300bps to 20%; growth levers would be from better payor and case mix, cost optimization efforts and divestment plan of loss making units. Overall we have factored in 18.2% and 19.4% OPM in FY24 and FY25E respectively in hospital segment.