Prabhudas Lilladher has reaffirmed its Buy rating on Fortis Healthcare (FORH), setting a revised target price of Rs 710, indicating a potential upside from the current market price of Rs 621. This update highlights Fortis’s strong performance across its hospital and diagnostic segments, supported by margin improvements, strategic bed expansions, and cost-efficiency measures. Below is a detailed breakdown of the drivers supporting Prabhudas Lilladher’s positive outlook on Fortis Healthcare.

Robust Q2FY25 Financial Performance Surpasses Expectations

EBITDA Growth and Margin Improvement: Fortis reported a consolidated EBITDA of Rs 4.3 billion for Q2FY25, a 31.7% YoY increase, exceeding forecasts by 10%. The hospital segment contributed Rs 3.55 billion in EBITDA, reflecting a 33% YoY growth, while the diagnostic segment grew by 28% to Rs 800 million. Overall, the hospital operating margin (OPM) improved by 300 basis points to 21.5%, demonstrating operational resilience and efficiency.

Revenue Driven by High Occupancy and Enhanced Case Mix: Total revenue rose by 12.3% YoY to Rs 19.88 billion, supported by a 14% YoY growth in hospital revenue and a 5% YoY increase in diagnostic revenue. Occupancy rates improved to 72% in Q2FY25 from 69% a year ago, while the Average Revenue Per Occupied Bed (ARPOB) rose 7% YoY to Rs 64,900, driven by a more profitable case mix.

Strategic Expansion Plans to Support Long-Term Growth

Bed Addition and Hospital Expansion on Track: Fortis plans to add 1,100–1,200 beds over FY25–26, with 700 beds expected to be operational by H2FY25. Key facilities like Manesar, FMRI, and BG Road will contribute significant bed additions, with 350 beds in Manesar alone. Expansion initiatives are aimed at high-demand regions, with the FMRI unit set to add 220 beds by H1FY26.

Increased Focus on High-Margin Units: Key hospital units in Faridabad and Mulund are already achieving margins in the 15-25% range. As new beds become operational, Fortis anticipates improved occupancy rates and profit margins, positioning the company favorably in competitive healthcare markets.

Diagnostic Business Expansion and Margin Sustainability

Increased Stake in Agilus Diagnostics: Fortis will invest Rs 1.8 billion in its diagnostics segment, increasing its stake in Agilus Diagnostics to 88%. The diagnostics segment reported a 24% OPM in Q2FY25, with adjusted margins at 26.6% post-rebranding costs. The company’s strategy includes reducing the addition of new touchpoints to 600-700 annually to improve operational efficiency.

Growth Potential in Diagnostics with Seasonal Boosts: Fortis’s diagnostic services experienced a strong seasonal uplift, and with expanded ownership in Agilus, the company expects margin sustainability and growth in revenue contribution from this segment over the next few years.

Operational Efficiencies and Cost Management Initiatives

Cost Rationalization and Lower Debt Levels: Fortis achieved cost savings through efficient workforce management and streamlined overheads, leading to a reduced cost-to-income ratio. Additionally, net debt decreased by Rs 270 million to Rs 2.8 billion, reflecting the company’s commitment to maintaining a healthy balance sheet and limiting financial liabilities.

Rebranding and Digital Transformation: With Rs 90 million allocated to rebranding expenses for Agilus, Fortis is also investing in digital solutions aimed at enhancing patient experience and operational efficiency. This investment underscores Fortis’s commitment to modernization and service excellence across its business units.

Financial Forecasts and Target Price Justification

Improved EBITDA and Revenue Projections: Prabhudas Lilladher has revised its EBITDA estimates for FY26 and FY27, with expected growth rates of 20% CAGR over FY24-27E. EBITDA projections for FY26 and FY27 now stand at Rs 18.92 billion and Rs 22.08 billion, respectively, with anticipated margins of 22-23% as Fortis realizes operational synergies.

Valuation Based on High Earnings Potential: The revised target price of Rs 710 is based on an EV/EBITDA multiple of 26x for the hospital segment and 25x for diagnostics on FY27E. This valuation takes into account Fortis’s strong position in the healthcare sector, underpinned by its growing market share in both hospitals and diagnostics.

Risks and Considerations for Investors

Competitive Pressures and Margin Volatility: While Fortis has achieved strong growth, competition in the healthcare sector, especially in metro regions, could impact pricing power and margins. The company’s ability to manage patient acquisition costs and maintain profitability in the face of rising competition will be key to sustaining its growth trajectory.

Regulatory and Expansion Risks: Delays in obtaining regulatory approvals for new facilities or unforeseen challenges in bed expansions could impact growth projections. Additionally, any adverse regulatory changes in the healthcare industry may pose operational risks for Fortis’s ongoing expansion plans.