CMP: Rs.151                  RECOMMENDATION : BUY AT DECLINES

BACKGROUND:

Promoted by the  Ranbaxy group,  Fortis Healthcare has a  chain of 45 hospitals with a total  capacity of ~ 6600 beds. Over the years,  Fortis has used acquisitions and investments to build a strong reputation in specialised areas such as cardiac care and orthopaedics and has  achieved  a decent scale of operations.

ANALYSTS’ NOTES

Having completed the Wockhardt acquisition  in December 2009, Fortis Hospitals plans to invest Rs. 2500 million, to implement a  nationwide expansion project   and some of its plans include setting up two new multi-speciality hospital projects in Kolkata and Bangalore, besides expanding its existing facility in Mumbai. The Kolkata and Mumbai multi-specialty projects, will have 414 beds and 300 beds capacity respectively, while the Bangalore facility will have 120 beds. It also has plans to set up a separate oncology division in Mumbai in 2010. In Bangalore, the addition of 200 beds will give it a total capacity of 1000 by 2011 and will include 120 intensive care unit beds too.

In Q3FY10 the company reported revenues of Rs 2325 million, up 44.3% y-o-y. This robust revenue growth was mainly led by incremental revenues of Rs 352 million from 10 Wockhardt hospitals (through acquisition) and Malar Hospitals (through conversion into subsidiary company) apart from a better operating performance. During the quarter, it  also repaid a short-term loan of Rs 171 crore which in turn resulted in  interest cost savings of Rs 45 million for the said quarter. This augured well for  the net profits for the quarter which stood at Rs. 217 million , a growth of 327%, y-o-y.

Key specialties like Cardiac Sciences grew at 36% while the Neuro Sciences segment grew by 93%. Similarly, other key specialties viz. Orthopedics, Renal Sciences and Oncology grew by 19%, 28% and 44% respectively.
 
CONCLUSION:

The demand supply scenario in the industry is favourable and Fortis appears well placed to consolidate its position in the industry.

Further it trades at a PE multiple of 20 based on its FY 2011 earnings, which seem to have factored in most positives. However given the potential in the segment and the company’s unique positioning in the industry backed by a strong management, it appears to be a fair  bet at declines for those with medium to long term investment horizon.