Fortis in line for aggressive turnaround as market grows bullish on healthcare

The success of IPOs of healthcare companies like Dr Lal PathLabs and Narayana Hrudayalaya (NHL) has had a rub off effect on its listed peers — Apollo Hospitals and Fortis Healthcare — both gained 7% and 9%, respectively in the past one month. A spate of new IPOs of firms like HealthCare Global Enterprises, New Delhi Centre for Sight and Aster DM Healthcare in the coming months is likely to keep the sector on investors’ radar.

While Apollo Hospitals is larger and more consistent performer, Fortis is the one holding promise of a more aggressive turnaround. Apollo Hospitals, with a chain of 64 hospitals and bed capacity of 8,985 beds and 2,217 pharmacies has been growing at a steady rate of 18-20% annually. It has maintained its operating margin before considering depreciation (EBITDA margin)in the range of 14-16% in the past couple of years.

Apollo is in the final stage of its current expansion plan and is focussed on commencing new capacity and consolidating its leadership position. Its stock trades at a premium valuations of four times the revenues.

On the other hand, Fortis Healthcare, after changing its strategy from being global to a local player, is showing uptick in its performance. The company has total bed capacity of around 4,600 beds and 57% stake in SRL Diagnostics. After posting loss in FY15, it clocked profit in the past two quarters, along with sequential improvement in margins. It plans to focus on high-margin business, improve the balance sheet and expand through investment in brown field projects over the next couple of years.

Fortis stock is trading at half the valuation of the market leader Apollo. An improving earnings growth, low base effect and attractive valuations make the case for a possible re-rating of the stock.