PL Stock Report: Fortis Healthcare (FORH IN) - Q1FY24 Result Update - Hospital EBIDTA miss; occupancy to improve - BUY

Fortis Healthcare (FORH IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs324 | TP: Rs365

Q1FY24 Result Update - Hospital EBIDTA miss; occupancy to improve

Quick Pointers:

♦ Received approval for Agilus (SRL) to initiate OFS.

♦ Overall demand environment remains healthy; occupancy to pick up.

Fortis Healthcare (FORH) Q1FY24 hospital EBIDTA was 6% below our estimate, led by certain one offs (Rs70mn) and lower margins. Though hospital margins were lower in Q1, 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 broadly remain unchanged. We expect 18% Pre IND AS EBIDTA CAGR over FY23-25E. At CMP, stock is trading at 19x EV/EBIDTA on FY25E, adjusted for ADL (SRL). Maintain ‘Buy’ rating and TP of Rs.365; valuing hospital segment at 20x 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.

♦ Occupancy dropped on seasonality; Healthy ARPOB: Hospital business revenue was flat QoQ (up 14% YoY) to Rs.13.5bn in line with our estimates. Diagnostic business saw net revenue growth of 3% YoY (4% QoQ) to Rs. 3.03bn. Non-Covid revenues grew by 9% YoY. Hospital occupancy declined to 64% vs 67% QoQ; impacted due to seasonality and operationalization of additional 90 beds during the quarter. ARPOB further improved by 12% YoY and 5% QoQ to Rs.60.1K aided by higher surgical mix and price hike. Net debt increased by Rs630mn QoQ to Rs 3.9bn.

♦ EBIDTA largely in line; Adj. hospital margin at 15.7%: FORH’s consolidated EBIDTA increased 9% YoY and 1% QoQ to Rs 2.7bn; Adjusted for one offs, EBITDA came in at Rs2.8bn; largely in line with our estimate. Hospital business EBIDTA came in at Rs 2.06bn (6% below our estimates), up by 7% YoY (down 7% QoQ). Overall hospital OPM came in at 15.2% (down 120 bps QoQ). Adjusted for one offs, hospital EBIDTA and OPM came in at Rs2.12bn and 15.7%; respectively. International patients contributed 8.5% to total hospital revenues while surgical mix was at 61% vs 59% in FY23. Diagnostic business EBIDTA came in at Rs 664mn (up 15% YoY) with OPM of 22%.

♦ Key con-call takeaways: (1) Margins compression in hospital segment was due to higher share of scheme patients, certain one offs and lower occupancy. One offs to tune of Rs70mn related to approval for building regulation cost at its Kolkata unit and higher legal cost. (2) Benefit of Arcot road monetization will be reflected from Q2. (3) Mgmt guided international biz to contribute to double digit soon; currently at 9%. (4) ARPOB growth guidance of 4-5% in FY24 (2-3% hike taken in Q1) and occupancy target of 68-70% in 2-3 years on extended bed capacity. (5) The new unit at Manesar will take a year to get commission with plans to start 30% capacity (125 beds) and post 2 years’ full capacity will be commission. The facility to take 18 months to breakeven. (6) Staff cost increased due to annual increment of 7-8% and recruitment of additional clinical talent. (7) Mgmt cited that July month has been good in terms of overall occupancy and see no slowdown in demand environment. (8) Diagnostics biz - SRL added +165 new customer touch-point centers in Q1. B2C: B2B mix stood at 53:47 in Q1. (9) Overall reporting of hospital wise margins have been changed which now includes corporate overhead cost.

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