Fortis Healthcare

Hospital industry will see normalisation by the end of 2QFY21: Fortis Healthcare

Update on the Indian Equity Market:

On Friday, Nifty ended 1.5% higher at 10,244. The top gainers for Nifty 50 were Bajaj Finserv (+9.2%), Bajaj Finance (+6.6%) and Reliance Ind (+6.5%) while the losing stocks for the IndusInd bank (-2.2%), M&M (-1.3%) and Vedanta (-1.3%). Sectoral gainers for the day were Realty (+6.4%), PSU Bank (+2.2%) and Media (2.0%) while the losers were IT (-0.4%) and Metal (-0.1%).

Edited excerpts of an interview with Dr Ashutosh Raghuvanshi, CEO, Fortis Healthcare Ltd; dated 18th June 2020 from Economic Times:

  • The pandemic has affected the routine work of the hospitals and surgeries in a big way. The impact started somewhere in the month of February 20. Thus, the impact can be seen in 4QFY20 as well as 1QFY21E.
  • Volumes got reduced to the emergency work but a gradual resumption of activities on the side of chronic illnesses. Fortis believes that this is a short term blip but there is going to be a sustained and pent up demand of elective work especially for chronic ailments which are going to last for at least 6 months following the normal resumption of activities.
  • Industry sees an upward swing in COVID cases in cities other than Delhi and Mumbai.
  • Fundamentals for the healthcare industry continue to remain strong in the medium term.
  • In April-20 the occupancy levels were 25% which went up to 35% in May-20. In this month the recovery in the average occupancy levels stands at 48%. With this kind of recovery, 60% occupancy expected in July and then normalcy by the end of 2QFY21.
  • Fortis expects FY21 earnings to take a slight hit but expects 3Q and 4Q FY21 to be at normal levels in terms of both revenues and profits.
  • Initiatives in terms of cost and restructuring for Fortis are on-going. Lockdown gave them the opportunity to focus more on these elements. They are in a comfortable position in terms of cash flows even after the fall in revenues in 4QFY20.
  • Fortis is continuously evaluating its portfolio to see which units need to shape up or not performing well to rationalise the portfolio.
  • Staff cost is being relooked at, especially the senior staff members in order to be aligned with the Company’s interest. So conversations are going on. Establishment cost and advertisement cost are been rationalised. Expenses are needed to be prioritised.
  • Some of the CAPEX are been deferred in FY21, for example, land up-gradation of clinical infrastructure.
  • When asked about the price capping that is happening in this industry which will hurt the private players, he said that the margins are expected to be lower as compared to the current ones but the price capping will boost the volumes for the private players. So going forward, volumes are expected to compensate for the lower margins

Consensus Estimate: (Source: market screener website)

  • The closing price of Fortis Healthcare Ltd was ₹ 122/- as of 19-June-2020. It traded at 27.5x the consensus EPS estimate of ₹ 4.4 for FY22E.
  • The consensus target price of ₹ 165/- implies a PE multiple of 37x on FY22E EPS of ₹ 4.4/-.

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