Fortis Healthcare

Shareholders with a long-term perspective can retain their holdings in the stock of Fortis Healthcare, which is now the largest healthcare provider in India.

The company's well-established hospital network across the country, likely additions to the overall capacities in the next couple of years and the potential synergies from its string of acquisitions, with the latest being a 24 per cent stake purchase in Singapore-based Parkway Holdings, underscore our recommendation.

Domestic acquisitions have also lent it greater bargaining power, given the centralised sourcing of inventory for its hospitals.

The stock, however, appears to have factored in most of the benefits into its price.

At current market price of Rs 180, it trades at about 45 times its likely per share earnings and at about 20 times its likely EV/EBIDTA for FY11. This may leave little room for price appreciation in the near-term, especially since the current valuations are also at a significant premium to that of Apollo Hospitals.

Though the valuation gap to some extent can be justified, concerns regarding the expensive valuation of its recent purchase and the resultant overhang on earnings growth could keep the stock price pressured in near-term.

A long-term perspective, therefore, is a must for shareholders to best enjoy the benefits from the company's recent acquisitions.

High-growth trajectory

Fortis has charted a high-growth trajectory for itself largely with the help of acquisitions; its revenues grew at a CAGR of about 28.5 per cent in the last three years.

While the buyout of 10 hospitals from the beleaguered Wockhardt Hospitals last year helped it gain a nationwide presence and inch closer to market leader Apollo Hospitals, its latest acquisition has helped it supersede Apollo and secure the top position in the domestic healthcare market.

It now has over 62 hospitals and roughly over 10,000 beds under its ambit, much higher than that of Apollo's.

For a company that has largely grown through acquisitions, it also has an impressive track record in integration — previous buys such as Escorts in Delhi and Malar Hospitals in Chennai, for instance.

In the just ended December quarter, all its hospitals (but for the one in Mohali) reported a healthy growth in revenues and operating margins.

Overall, the company also improved its occupancies to 74 per cent from 70 per cent seen in the corresponding quarter last year.

There was also notable improvement in the average revenue per occupied bed (at Rs 86 lakh) and average length of stay (3.7 days). With ten hospitals from the Wockhardt portfolio being added to its kitty this quarter, the overall numbers are set to improve further.

For one, these hospitals are located in metros and have fairly healthy occupancies and margins.

Second, Fortis would also benefit from the potential synergies in terms of shared talent pool, technologies, and common sourcing of inventories.

Third, the attractive deal valuations — pegged at about Rs 909 crore — which will make it easier for the investment to pay off sooner than later.

Parkway deal

Fortis, however, appears to have bought the 23.9 per cent stake in Singapore-based Parkway Holdings at a high price. It bought the stake for about $685.3 million (about Rs 3,000 crore), valuing the company at about $2.8 billion (20 per cent premium to its market capitalisation then) and at about 17 times its CY09 EBITDA.

While to some extent, that Parkway is a well-established and profit making hospital chain in its region may justify the premiums, Fortis seems to have stretched a tad too much for the strategic stake and management control.

No doubt, Fortis will be able to extract benefits from the latter's network of 16 hospitals with over 3,400 beds spread across six countries; it is now also at a better vantage to benefit from the strengthening undercurrents of medical tourism.

There even are synergies in terms of multispecialty capabilities, innovative technologies in stem cell therapy and organ transplantation. But the potential benefits can be reaped only in the long run.

The foreign currency debt and warrants that Fortis is planning on taking to fund the deal may eclipse earning growth in the near-term.