Wednesday, July 4, 2012


Stretched balance sheet remains a concern, maintain a Sell

Following a management meet with Fortis Healthcare (FH) we believe that near- to mid-term pain persists due to a stretched balance sheet and lower margins in SRL (Super Religare Laboratories). FH has been affected by uncertainty following its acquisition of Fortis Healthcare International (FHI) and its resulting stretched balance sheet. The India hospitals business should continue strong growth led by huge demand. We maintain a Sell with a target price of `102.

 Momentum continues in the domestic hospitals segment. FH’s Indian hospitals segment continues to do well and expects to add more than 600 operational beds in FY13 on a base of ~2,900 beds at the end of FY12. We expect 22.4% CAGR revenue over FY12-15. We have assumed 10% increase in ARPOB (average revenue per operating bed) and gradual increase in occupancy levels.

 SRL suffering from lower profitability. SRL has been reporting ~7% EBITDA margin from the past two quarters vs. ~15% earlier due to the commencement of three large labs in Kolkata, Bangalore and Delhi and
high rental cost at existing labs. The management expects a double-digit margin in FY13. However, we expect recovery to be gradual, with double-digit margin in FY14.

 Stretched balance sheet. FH has a significantly higher net debt, of US$1.3bn, translating to an FY12 debt-equity of 2.1x. Further, goodwill on the consolidation/acquisition, at `64.8bn, is very high, amounting to
half the company’s assets. The company is taking various steps to improve the situation, such as equity dilution in SRL and potential listing of its Clinical Establishment division on the Singapore Exchange.

 Valuation. We maintain a Sell with a price target of `102, based on 15x FH EBITDA and 12x FHI EBITDA. Risk: Equity raising at premium valuations.