Expanding Specialized Services In Oncology And Neurosciences Will Boost Future Performance

Key Takeaways

• Expansion in specialized services and strategic divestments of underperforming facilities suggest potential for increased revenue and improved margins.
  
• Acquisition in diagnostics and resolution of legal issues could stabilize operations and positively impact future growth and earnings.
  
• Rising competition, underperforming units, legal challenges, and rebranding costs pose risks to Fortis Healthcare’s short-term profitability and market share growth.

Catalysts

An integrated healthcare delivery service provider, offers secondary, tertiary, and quaternary care in India.

• The expansion of hospital facilities, with significant improvement in hospital occupancy and specialized services like oncology and neurosciences growing rapidly, suggests potential for increased future revenue and improved net margins.
  
• The hospital business' strong operating EBITDA growth and improvement in margin to 20% indicates operational efficiencies that can positively impact future earnings.
  
• The acquisition of a larger equity stake in Agilus Diagnostics and expected scaling up of its network and offerings can drive future revenue growth and margins once rebranding expenses taper off.
  
• The strategic divestment of underperforming facilities in favor of profitable growth can enhance overall profitability and net margins.
  
• The potential acquisition of the Fortis brand and resolution of legal cases could stabilize operations and potentially unlock value, affecting both revenue and earnings positively.

Fortis Healthcare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortis Healthcare's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 13.7% in 3 years time.
• Analysts expect earnings to reach ₹15.3 billion (and earnings per share of ₹20.4) by about March 2028, up from ₹7.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹11.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.6x on those 2028 earnings, down from 59.9x today. This future PE is greater than the current PE for the IN Healthcare industry at 36.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Fortis Healthcare Future Earnings Per Share Growth

Risks

• Competitive intensity in the healthcare sector is rising as peers aggressively expand both through greenfield projects and acquisitions, potentially impacting Fortis Healthcare’s market share and future revenue growth.
  
• The Manesar greenfield facility is currently incurring losses, with breakeven expected by the first quarter of the next fiscal year, possibly affecting short-term profitability and net margins until it stabilizes.
  
• Some Fortis hospitals, such as those in Jaipur and Vashi, are underperforming with lower occupancy and margins, which could weigh down overall hospital segment earnings and margins if improvements are not made.
  
• The Agilus Diagnostics business is still recovering from the rebranding exercise with ongoing costs, and slower growth could imply risk in achieving margin expansion and revenue targets in the diagnostics segment.
  
• Legal proceedings related to the Fortis brand acquisition and open offer are ongoing, which could result in increased legal costs and delayed corporate actions, potentially impacting financial performance and investor confidence in the short term.

Valuation

• The analysts have a consensus price target of ₹736.533 for Fortis Healthcare based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹850.0, and the most bearish reporting a price target of just ₹550.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹111.8 billion, earnings will come to ₹15.3 billion, and it would be trading on a PE ratio of 51.6x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹609.85, the analyst price target of ₹736.53 is 17.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.