Fortis Healthcare: Booster dose

The acquisition will help Fortis scale up faster and achieve a pan-India presence. 

Adjusting for beds that will not fetch revenues in 2009-10, Fortis Healthcare’s acquisition of 10 hospitals of Wockhardt Hospitals is valued at a current EV/EBITDA (enterprise value/earnings before interest tax and depreciation) multiple of 8.5 times and a current EV/sales (enterprise value to sales) multiple of just under two times. 

That seems to be a fairly reasonable valuation; in the current year, the 10 hospitals should earn revenues of close to Rs 375 crore and an operating profit of around Rs 85 crore, implying an operating profit margin of just under 23 per cent. 

Industry watchers point out that it typically costs around Rs 70 lakh to put up a bed; in this instance, the cost of a completed bed is just under Rs 60 lakh and so Fortis has saved itself some expense. Moreover, the Fortis management has said that it is not taking any debt from Wockhardt and is simply acquiring the assets. The business acquired is a profitable one and will add to Fortis’ revenues and per-share earnings in the current year.

That’s one reason why the Fortis Healthcare stock rose 6.6 per cent on Monday to close at Rs 116. The acquisition should pay off because it gives Fortis a larger presence in key cities and an entry into cities such as Kolkata. The company should be able to cut costs and exploit synergies. 

Fortis had targetted a network of around 40 hospitals, or approximately 6,000 beds, by 2012. The acquisition will give it around 1,900 beds. The company has been trying to create an asset light structure by entering more O&M contracts, which will help expand reach and grow the top line without increasing the asset base. 

Fortis is expected to post revenues in the region of Rs 900 crore in the current year and an operating profit of around Rs 150 crore.