Though the Fortis Healthcare management’s decision to sell its stake in Parkway Holdings pegs back its plans to be a global healthcare service provider, the company is on course to double its revenues over the next two years on the back of a rapidly growing domestic hospital network, according to analysts.
The company has relied on the inorganic route to grow its business with beds under operation (which refers to number of patients that can be treated at one time) increasing from 1,749 to 6,600 currently over the last four years. Though the markets welcomed the stake sale by pushing the stock up seven per cent intraday on Monday, it closed with gains of about three per cent.
Analysts say the move of not getting into a bidding war is a short-term positive as the company made a tidy Rs 300 crore profit (Rs 7.8 a share), has become debt free and will save on interest costs. Going ahead, the management has indicated a continuation of its inorganic strategy and is on the look out for suitable buys in India as well as overseas geographies. For now, however, growth is likely to come from domestic operations.
| PROFITABLE GROWTH | ||||
| In Rs crore | FY09 | FY10* | FY11E | FY12E |
| Number of beds | 3,025 | 6,609 | 7,823 | 8,668 |
| Occupancy (%) | 67 | 74 | 77 | 81 |
| Rev/bed (lakh) | 75 | 83 | 89 | 89 |
| Revenues | 659 | 988 | 1,710 | 2,500 |
| Ebitda | 114 | 190 | 144 | 230 |
| Net profit | 21 | 69 | 85 | 175 |
| P/E (x) | -- | 60.2 | 39.3 | 28.0 |
| *Acquired Wockhard Hospitals E: Estimates Source: Company, analyst reports | ||||
Expansion
The company plans to add 2,000 beds through the greenfield route, 63 per cent of which will come under the lease model. Given that over 60 per cent of the capex on a new hospital is on land and construction, the company prefers to lease and run them. This asset-light strategy helps in reducing the cost per bed, helping it reach profitability faster.
A Bank of America Merill Lynch report believes the company, which has over 60 per cent of its hospitals in metros, plans to move into the Tier-II and -III cities to improve its penetration, benefit from tax incentives and ensure more feeder traffic for its larger hospitals.
Profitability
The company has recorded eight quarters of consecutive profit growth on the back of a maturing business cycle. As occupancies, length of stay and the number of surgical procedures increase, the company will be able to improve its asset utilisation and profits. Average annual revenues per bed, for example, are likely increase from Rs 75 lakh in the financial year 2008-09 (FY09) to nearly Rs 90 lakh in FY12.
Further, the fact that the company focuses on such high-margin areas as cardio (40 per cent of revenues) – which are growing at a rapid clip – should ensure that profitability is maintained.
Investment rationale
Given the company’s expansion plans and the fact that the $38-billion Indian healthcare sector (most of it is controlled by the private sector) is expected to grow 23 per cent to reach $77 billion by the end of 2012, Fortis Healthcare is well positioned to benefit from a jump in healthcare spending.
At the current price, the stock is trading at 28 times its estimated FY12 earnings per share of Rs 5.6. Given that the debt overhang is no longer an issue and the domestic business is likely to grow rapidly, analysts expect the stock to return about 20-25 per cent over an 18-month period.
