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Fortis Healthcare (India) Ltd

High debt, interest costs a dampener

Fundamental Grade

Valuation Grade

Industry

3/5 (Good fundamentals)

4/5 (CMP has upside)

Healthcare Providers & Services

Fortis Healthcare (India) Ltd’s (Fortis’) Q2FY12 results were significantly below CRISIL Research’s expectations. Though revenue grew 70% y-o-y (aided by acquisition of Super Religare Laboratories [SRL] in May 2011), it was marginally below our expectations. Consolidated EBITDA margin of 14.3% was in line with our expectations but net loss of Rs 36 mn (adjusted for forex loss on external borrowings) was substantially below our profit estimates due to higher interest cost, lower-than-expected other income and losses in SRL. We revise our fundamental grade to 3/5 from 4/5 due to deteriorating balance sheet on higher-than-expected debt, delays in SRL ramp-up, shifting away from India-centric focus, the international business acquisition overhang and weak disclosure levels for inter-group transactions. Delay in SRL’s IPO and higher working capital led to an increase in debt levels and interest costs. Hence, we lower our earnings estimates.

Q2FY12 result analysis

Revenues grew by 70.5% y-o-y to Rs 6,101 mn aided by consolidation of Fortis’ subsidiary - SRL. The hospital business was up 35% y-o-y to Rs 4,830 mn supported by growth in the existing hospitals. The diagnostics business reported revenues of Rs 1,270 mn.

EBITDA margin improved by ~200 bps y-o-y to 14.3% supported by margin expansion in the existing hospitals. The hospital and the diagnostics business posted 15% and 11.4% margins, respectively.

The company reported net loss of Rs 126 mn in Q2FY12 against a profit of Rs 748 mn in Q2FY11. Adjusting for the forex loss of ~Rs 90 mn, Fortis posted net loss of Rs 36 mn due to net loss of Rs 32 mn in SRL, lower other income and higher debt and, subsequently, high interest costs.

Key developments – acquisition of international business

Fortis’ acquisition of promoter-owned entity – Fortis Healthcare International Pte Ltd (FHIP) - is at reasonable valuations of P/BV of 1.0x and FY12 EV/EBITDA of 14.0x; however, its future growth and successful integration will be a challenge (refer to event update dated November 10, 2011). Earnings estimates – revised downwards

We lower revenue and EBITDA margin estimates due to slow ramp-up in SRL’s business. Earnings have been lowered by 74% to Rs 1.1 in FY12 and 49% to Rs 2.4 in FY13 factoring in delays in SRL’s IPO and higher debt levels due to increase in working capital requirements. Valuation: Current market price has upside

We continue to use the discounted cash flow method to value Fortis. In line with revision in earnings estimates and increase in risk premium, we lower our fair value to Rs 112 per share from Rs 185. Given the current market price, our valuation grade is 4/5.

KEY FORECAST

(Rs mn)

FY09

FY10

FY11

FY12E

FY13E

Operating income EBITDA Adj PAT Adj EPS-Rs EPS growth (%) Dividend yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x)

6,354

9,487

15,037

24,958

30,187

825

1,352

2,199

3,517

4,411

87

564

833

434

978

0.8

1.4

2.2

1.1

2.4

NM

364.9

15.7

(48.3)

125.1

-

9.8

0.8

-

-

2.2

1.7

2.0

4.0

4.9

0.9

4.1

3.2

1.2

2.4

138.7

77.7

44.7

86.5

38.4

1.3

2.4

1.1

1.0

0.9

22.1

62.7

21.0

15.0

11.9

NM: Not meaningful; CMP: Current market price

Source: Company, CRISIL Research estimate

January 06, 2012

Source: Company, CRISIL Research estimate January 06, 2012 Fair Value Rs 112 CMP Rs 92 CFV
Fair Value Rs 112 CMP Rs 92 CFV MATRIX Excellent Fundamentals 5 4 3 2
Fair Value
Rs 112
CMP
Rs 92
CFV MATRIX
Excellent
Fundamentals
5
4
3
2
1
Fundamental Grade
Poor 1 2 3 4 5 Fundamentals Valuation Grade Strong Downside Strong Upside
Poor
1
2
3
4
5
Fundamentals
Valuation Grade
Strong
Downside
Strong
Upside

KEY STOCK STATISTICS

NIFTY / SENSEX

4754/15868

NSE / BSE ticker

FORTIS

Face value (Rs per share)

10

Shares outstanding (mn)

405

Market cap (Rs mn)/(US$ mn)

34,110/646

Enterprise value (Rs mn) /(US$ mn)

42,868/812

52-week range (Rs) (H/L)

176/76

Beta

0.8

Free float (%)

18.5%

Avg daily volumes (30-days)

1,325,431

Avg daily value (30-days) (Rs mn)

117.4

SHAREHOLDING PATTERN

100% 10.2% 9.4% 8.6% 9.2% 90% 1.7% 1.6% 0.8% 2.0% 6.3% 7.4% 8.3% 8.5% 80%
100%
10.2%
9.4%
8.6%
9.2%
90%
1.7%
1.6%
0.8%
2.0%
6.3%
7.4%
8.3%
8.5%
80%
70%
60%
50%
40%
81.5%
81.5%
81.5%
81.5%
30%
20%
10%
0%
Dec-10
Mar-11
Jun-11
Sep-11
Promote r
FII
DII
Others
PERFORMANCE VIS-À-VIS MARKET
Returns
1-m
3-m
6-m
12-m
FORTIS
-20%
-23%
-44%
-38%
NIFTY
-6%
0%
-16%
-22%

ANALYTICAL CONTACT

Chetan Majithia (Head)

Ravi Dodhia

Bhaskar Bukrediwala

Client servicing desk

+91 22 3342 3561

chetanmajithia@crisil.com

rdodhia@crisil.com

bsbukrediwala@crisil.com

clientservicing@crisil.com