Nomura ups target price for Fortis, sees 12% upside; reiterates 'Buy'

The Japanese brokerage firm Nomura has lifted Fortis Healthcare’s target price owing to growth in hospital business and low valuation to its peers. 

The global brokerage firm maintained its ‘Buy’ call for Fortis Healthcare with an updated twelve month forward target price of Rs 547, a 12 per cent upside to Monday’s close. This came after the brokerage raised its long term growth assumptions for the hospital factoring in contribution from 400 beds at the Mohali greenfield site and the impact of roll forward. 

The brokerage also noted that the hospital chain is trading at a discount to the average valuation for hospitals and diagnostic companies in India. With consistent improvement in hospital performance set to drive the discount lower.

 

Adequate levers for margin expansion 

The brokerage said that the hospital business financial performance is improving as it reported 20 per cent earnings before interest, tax, depreciation and amortisation (Ebitda) margin in the fourth quarter of fiscal year 2023-24 (Q4FY24). 

The hospital chain has guided for 200 basis points improvement in Ebitda margin, and expects 25 per cent Ebitda margin over the next 3-4 years, to be driven by divestment of loss-making units, cost control and industry tailwind that would lead to improving average revenue per occupied bed (ARPOB). 

Analysts at Nomura remained positive on Fortis Healthcare’s bed expansion to 6,000 operating beds over the next 3-4 years. With almost 60 per cent of the incremental bed capacity coming through brownfield expansion, at sites where the Ebitda margins are already above 20 per cent. 

The hospital chain currently operates a network of over 20 hospitals, 4,000 operational beds, and 400 diagnostics centres.

Moreover, they said that the occupancy levels for most of these hospitals are above 70 per cent currently. “Even for the greenfield sites at Gurgaon and Mohali, we are positive given the current record of operations in these locations. We expect brownfield expansion to help FORH leverage the current sites, thus driving Ebitda margins higher,” analysts wrote in a report. 

Diagnostic operations to lag 

On the downside risks, analysts said that the operations of Fortis Healthcare’s diagnostic subsidiary, Agilus, were recently impacted by brand name change, which we think will sustain in the near term.

Meanwhile, they said that Agilus has a well distributed presence in India, expecting considerable improvement in Ebitda margin from FY26F, on higher volumes and declined branding expenses. 

“The consolidated earnings cut in FY25F and 26Fof 6 per cent and 3 per cent, respectively is largely due to Agilus. There is potential for Fortis to buy out the stake of PE investors (if they exercise their put options) at Rs 18-20 billion given long- term growth prospects. The buyout will not constrain its hospital growth, in our view,” Saion Mukherjee, Amlan Jyoti Das and Adrit Chaturvedi of Nomura wrote in a recent report. 

Shares of Fortis Healthcare soared up to 1.63 per cent at Rs 494 per share on the BSE in Tuesday’s intraday trade. 

However, at 11:50 AM; the shares of the hospital chain were trading 1.03 per cent higher at Rs 491.05. In comparison the BSE Sensex was up by 0.21 per cent at 80,830 levels.