Fortis Healthcare: Correction a good entry point

Steady growth and value unlocking potential are keeping analysts positive on the company

The Fortis Healthcare stock has fallen about 30 per cent from its all-time high of ~230.90 seen in early May as investor sentiment weakened with the promoters’ plan to sell a stake in the company fizzling out. While the news flow around the promoter’s financial services company, Religare Enterprises, may also be weighing on sentiments, analysts say since Fortis Healthcare and Religare are two separate entities, with nil holding in each other, they are not worried.

Analysts say part of the correction is linked to uncertainty over the promoters’ stake sale plan in Fortis as Daiichi Sankyo keeps exploring legal ways to block any such potential deal to recover its alleged losses in the Ranbaxy acquisition from the promoters. Fortis has no link in the deal between Daiichi Sankyo and the promoters. Analysts, thus, believe the stock price reaction is exaggerated.

Rakesh Nayudu at Haitong International Research says while the promoters’ ongoing legal tussle with Daiichi is a valuation overhang, there is very little logic in the possibility of SRL Diagnostics (a Fortis subsidiary) listing being prevented due to this tussle. He expects SRL Diagnostics to list by August.

SRL’s listing could lead to significant value unlocking for Fortis’ shareholders, analysts said, considering valuation of other diagnostic companies. Given the potential value unlocking and attractive valuations of Fortis, most analysts remain positive on the stock.

Analysts at Motilal Oswal Securities expect a multiple rerating on the back of a multifold increase in Fortis’ hospital business’ Ebitda (operating profit), SRL demerger, assetlight expansion strategy, etc.

Fortis’ hospital business continues doing well and has seen a margin expansion in the past few years. Though the second half of FY17 has seen some pressure, mainly due to the note ban, it is expected to normalise. Analysts point out that the hospital segment is deriving more than 85 per cent of revenues from matured hospital beds (more than three years old) and thus operating margins will remain strong. The company’s plan to increase bed capacity will leverage the existing infrastructure, and this will reduce the high-capital commitment associated with new expansions.

By FY19, analysts at Motilal Oswal expect the hospital business’ Ebitda to grow more than 10x (from FY16 base), and diagnostics business’ margins to improve by 200 basis points. Nayudu projects a 13 per cent compounded annual growth (CAGR) in revenue driven by a corresponding 11 per cent CAGR for the hospital segment and 16 per cent CAGR for the diagnostics business till FY20.

Most analysts, including Anand Rathi, Motilal Oswal, Haitong, Spark Capital, have a target price of more than ~200 for the stock trading at ~162.65.