Fortis Healthcare’s stock has lost about 40 per cent in a year’s time (now Rs 100) as against a seven per cent fall in the Sensex. Striving for fast growth, Fortis has taken both organic and inorganic routes. After acquiring various hospitals in the Indian subcontinent, as Escorts, Malar and Wockhardt in the past few years, it acquired Fortis Healthcare International in FY12, to create a significant Pan-Asia presence. However, ever since the announcement of acquisition in September 2011 (completed in January 2012 at a cost of around Rs 3,200 crore), which has led to an increase in debt, the stock has underperformed broader markets.
Though the consolidation is positive and can propel further growth and brings benefits in terms of synergies of operations, debt has grown seven-folds to Rs 4,653 crore at the end of FY12, compared to Rs 642 crore in FY11.
In this backdrop, the benefits of expansion and thus fast revenue growth are unlikely to be reflected in the bottom line, due to increase in interest and depreciation costs and hence, lower earnings growth in FY13. But, with FY14 projections indicating a surge in earnings and the company planning to raise money through sale of equity in one of its businesses, investors with a one to two-year perspective may consider the stock.
| SUBDUED PROFIT GROWTH IN FY13 | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 2,982.8 | 5,373.0 | 6,182.4 |
| % change y-o-y | 101.1 | 80.1 | 15.1 |
| Ebitda | 400.0 | 764.6 | 908.5 |
| Ebitda (%) | 13.4 | 14.2 | 14.7 |
| Interest | 219.6 | 475.8 | 487.8 |
| Net profit | 72.2 | 86.5 | 159.8 |
| % change y-o-y | -42.0 | 19.8 | 84.7 |
| EPS (Rs) | 1.8 | 2.1 | 3.9 |
| PE (x) | 57.1 | 47.5 | 25.8 |
| E: Estimates Source: HSBC Research | |||
Fortis in strong expansion mode
While Fortis added 10 hospitals with a potential capacity of around 2,200 beds in the India market in FY12, it also integrated Super Religare Laboratories (SRL), acquiring stakes for Rs 803 crore. In FY13, it plans to add 600 more beds. Thus, during FY12-15, analysts at Anand Rathi expect a compounded annual growth rate (CAGR) of 22.4 per cent in revenue, whereas Girish Bakhru of HSBC estimates a 15 per cent CAGR in revenues in the India hospitals business.
However, with the acquisition of Fortis Healthcare International, the international hospitals business now accounts for 50 per cent of consolidated revenues. Given that business outside India is new and has few comparables, Bakhru sees a modest growth in the near term. He expects revenue contribution from the international business to remain at 50 per cent over FY13-15. The Australian Dental Corp and Hoan My hospitals in Vietnam are likely to see double-digit growth and commencement of a speciality colorectal hospital in Singapore can provide further growth momentum.
SRL’s margin concerns
SRL continues to disappoint on profitability. It reported earning before interest, taxes, depreciation and amortisation (Ebitda) margins of close to seven per cent in the past two quarters, against 15 per cent earlier. Analysts attribute this to the commencement of three huge laboratories in FY12 (Bangalore, Kolkata and Delhi), as well as high rentals at the other locations. The company now has around 210 laboratories. Though the management expects double-digit margins in FY13, analysts at Anand Rathi, expect a gradual improvement with margins rising to double-digits in FY14. They see a 15 per cent revenue growth CAGR over FY12-15 in SRL’s business.
Debt still an overhang
While revenue growth remains strong and the hospital business will contribute well to operating margins (14 per cent in the March 2012 quarter), high debt will lead to higher interest outgo. Analysts at Anand Rathi believe that more than half of Fortis’ Ebitda would be eroded by interest costs. Such high debt would lead to subdued net profit and cash flow in FY13. Further, they do not see normal business profits providing any material improvement in leverage over the next two to three years. Bakhru of HSBC expresses his concern over the health of the balance sheet and muted margin expansion.
However, a respite can come if the company’s plan of raising equity by listing a division called Clinical Establishment (clinical establishment services and radio-diagnostic services) on the Singapore Exchange, materialises. The company plans to garner around Rs 2,000 crore from this move, which can significantly lower the debt.
The consensus one-year target price for the stock at Rs 104, according to Bloomberg data, shows a limited upside for the stock now. But, if things go according to plan, these could be revised upwards.
