Fortis Healthcare's Margin To Be Driven By Three Key Factors, Nomura Says

Fortis Healthcare Ltd.'s revenue will continue to grow owing to sustained improvement in operating margin, according to Nomura.

While Fortis may lag its peers on Ebitda margin, the company's hospital business is on the mend due to accelerated revenue growth post the IHH takeover in 2018, the brokerage said in a June 30 note.

According to Nomura, Fortis Healthcare's margin improvement will be driven by three factors in the near-to-medium term:

• Expected divestment and closure of loss-making facilities.

• Addition of almost 1,400 beds through brownfield expansion.

• Rising contribution of oncology in the short-to-medium term.

Nomura maintains a 'buy rating on the stock and raised its price target from Rs 325 apiece to Rs 368 per share, implying a potential upside of nearly 18%.

Nomura On Fortis Healthcare

• Maintains a 'buy' rating with a price target of Rs 368 apiece.

• The gross margin for Fortis is largely in line with peers like Max Healthcare Institute Ltd. and Medanta. However, the Ebitda margin is lower, primarily due to higher overheads like higher doctor and employee costs. In fiscal 2022 alone, doctor and employee costs accounted for 47% of total sales for Fortis, against 39% for Max and 36% for Medanta.

• Nomura expects Fortis to divest, close, and turn around six of its low-margin and loss-making facilities that generate sub-optimal Ebitda margins. These facilities reduced the hospital segment's Ebitda margin by almost 3.1% in fiscal 2023.

• Divestment of these assets is likely to result in an Ebitda margin expansion of 270 basis points to a net 19.6% from 2023 to 2025.

• The company's Ebitda margins are expected to improve upon the addition of almost 1,400 beds, which represent 35% of its current capacity, through brownfield expansion over the next five years.

• Oncology revenue, which currently contributes about 13% to the company's sales, is likely to rise to 20% in the medium term.

• Major risks for Fortis include lower-than-estimated volume growth in hospitals and weaker-than-estimated price realisation due to increased competition.

Shares of Fortis Healthcare were trading 0.22% lower at Rs 314.35 apiece, compared to a 0.65% growth in the benchmark Nifty 50 as of 1:00 p.m. on Monday.

All 12 analysts tracking the company maintain a 'buy' rating, according to Bloomberg data. The average 12-month price target implies an upside of 12.1%.