ICICIdirect Fortis-Wockhardt Deal

8/3/2019 ICICIdirect Fortis-Wockhardt Deal

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ICICIdirect | Equity Research

April 01, 2009| Healthcare

Fortis Healthcare (FORHEA)EVENT UPDATE √

Eyeing controlling stake in Wockhardt…

Fortis Healthcare is eyeing a 74% stake in Wockhardt Hospitals. The company has emerged as the frontrunner toacquire a stake in Wockhardt Hospitals for Rs 750 crore. This deal values Wockhardt Hospitals at just over Rs 1000crore, which is quite cheap compared to its IPO valuation of over Rs 3200 crore a year back. If the dealmaterialises, Fortis is likely to invest Rs 400 crore in the first phase for a 40% stake and will raise its stake to 74%subsequently.

Objectives of this acquisitionWe believe the following reasons motivated Fortis Healthcare to go ahead with this possible acquisition:

• Strategic expansion in western and southern region• Impressive financials of target company• To strengthen market position and brand equity• To make its proposed rights issue more attractive for investors• To tap the opportunity of cheaper valuations

Valuations

If the deal goes through it would be beneficial for both companies especially Fortis Healthcare based on the reasonsmentioned above. Since the deal is yet to be finalised and confirmed by the management, we continue to maintain

our forecasted financials and target price of Rs 92, which we arrived at by using the DCF methodology. At this target

price, the stock is available at 86.1x and 33x its FY09E and FY10E estimates, respectively. Though the stock looks

expensive on a P/E multiple basis, considering the company’s financial turnaround, the management’s aggressive

expansion strategy, low debt to equity and enough liquidity, the stock commands a premium compared to its peer

companies.

Exhibit 1: Financial Summary

FY07 FY08 FY09E FY10E

Net Sales 512.4 507.1 630.8 914.6

Operating Profit 48.5 20.6 89.7 122.2

Net Profit -98.1 -55.5 24.1 63.0Operating Margins 9.5% 4.1% 14.2% 13.4%

Net Profit Margins NA NA 3.8% 6.9%

Diluted EPS(Rs.) -5.4 -2.4 1.1 2.8

RoCE -4.7% -1.8% 3.1% 5.3%

RoE -26.6% -4.9% 2.4% 6.0%

Note: Not adjusted for proposed stake buy

Source: Company, ICICIdirect.com Research

Current PriceRs 68

Target PriceRs 92

Potential upside35%

Time Frame12-15 months

OUTPERFORMER

Rashesh [email protected]

WHAT’S CHANGED…

PRICE TARGET…………………………………………………………..…….Unchanged

EPS (FY09E)………………………………………….………………………..Unchanged

EPS (FY10E)…………………………………………………………………...UnchangedRATING……………………………………………….........................………..Unchanged



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Objectives of acquisition:

• Strategic expansion in western and southern region

Fortis currently has a strong presence in north India with over 60% of its total bed capacity based in this

region. Its two major upcoming projects are also located in Delhi and Gurgaon. These are expected to get

launched by the end of FY10 and FY11, respectively. In contrast, Wockhardt only has a presence in the west

and south region with over 70% of its total revenues coming in from hospitals located in Bangalore and

Mumbai. Through this deal, Fortis would be able to tap the markets in the west and south region. Fortis is

also currently working on its new hospital project at Vashi with a total bed capacity of 150. This is expected to

get completed by Q2FY10

Exhibit 2: Existing locations: Fortis Healthcare

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200

400

600

800

1000

1200

1400

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M a u r i t i u s

B a n g a

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R a

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Total Beds


Exhibit 3: Existing locations: Wockhardt Hospital

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200

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600

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Total Beds


• Impressive financial records of target company

Wockhardt Hospitals has maintained higher operating margins of over 16% in the past three years compared

to the operating margins of Fortis Healthcare, currently at 12%. However, on account of its higher debt equity

ratio of about 5.2:1, Wockhardt’s net profit margins have remained in the range of 5-7%. Through this stake

buy, Fortis would be able to improve its net profit margins and, thereby, its return ratios, going forward

Exhibit 4: Financial summary

FY05 FY06 FY07 9M FY08

Net Sales 129.1 158.68 236.48 259.48

Operating Profit 21.64 28.25 39.28 53.96Net Profit 1.41 13.93 15.59 7.31

Operating Margin 16.80% 17.80% 16.60% 20.80%

Net Profit Margin 1.10% 8.80% 6.60% 2.80%

Outstanding Shares 2.5 5 5 7.43

Diluted EPS (Rs) 0.56 2.79 3.12 0.98

RoCE 17.0% 15.7% 11.4% 10.7%

RoE 5.1% 33.2% 27.1% 10.4%

Source: RHP, ICICIdirect.com Research



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• To strengthen market position and brand equity

Fortis has aggressively used the acquisition route to strengthen its position in the market and its brand

value, which is quite visible from the past data. The acquisition of Escorts (EHIRC) in 2005 and

International Hospitals (IHL) in 2006 has helped the company to become a stronger player in cardiology

and other specialities in North India. In September 2007, the company also acquired a controlling stake in

the Chennai-based Malar Hospital. This strategy works for the company when expansion is desired at a

faster pace. Also, a running hospital would start generating revenue from the day of the acquisition

• To make its proposed rights issue more attractive for investorsThe Fortis management has approved a Rs 1,000-crore rights issue and warrant issue for an unspecifiedamount in December 2008 for its expansions. Due to huge equity dilution post rights issue, we expectsome pressure on its EPS for FY10E. However, with the utilisation of the rights issue proceeds in thisproposed acquisition instead of utilising the whole rights issue proceeds in greenfield projects, Fortiswould certainly be able to improve its profitability and EPS since this acquisition would start generatingreturns from the day of acquisitions. This, in turn, would make its forthcoming rights issue more attractiveto investors. It is to be noted that the hospital industry, being capital intensive, requires nearly two tothree years in setting up a hospital under greenfield expansions

• To tap the opportunity of attractive valuationsThe ongoing slowdown has thrown up an opportunity for cash rich companies looking for expansions at fair valuations. This is clearly evident from the fact that Wockhardt is currently being valued at Rs 1,000crore (i.e. EV of Rs 72 lakh per bed) from its previous IPO valuation of over Rs 3,200 crore (i.e. EV of Rs 1.8crore per bed), representing a reduction of over 60% in its valuations. After Ranbaxy’s stake sale, thepromoters of the company are now fuelled with ample liquidity. Also, the promoters hold nearly 68%stake in the company. At the same time, the Wockhardt group needs funds to repay its substantial debt,which is more than 2.5 times its total equity. Hence, if the deal goes through it would be financiallybeneficial for both Wockhardt and Fortis. The proposed deal would also be strategically beneficial forFortis

Concerns:

• Valuation of Wockhardt still higherThe deal values Wockhardt Hospitals at Rs 1000 crore. Since the promoters are selling their stake in thecompany, we are assuming that the debt burden of Wockhardt, which is at around Rs.435 crore (as per itsDRHP), would be passed on to Fortis. Hence, the enterprise value comes to Rs 1435 crore. On a per bedbasis it works out to Rs 72 lakh, which we feel is 16% higher compared to the current market EV per bedof Rs 62-65 lakh. However, considering the abovementioned key positives, the valuation is still justifiedeven with the premium of over 15%



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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations.ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. currentmarket price and then categorises them as Outperformer, Performer, Hold andUnderperformer. The performance horizon is two years unless specified and the notional targetprice is defined as the analysts' valuation for a stock.

Outperformer (OP): 20% or more;Performer (P): Between 10% and 20%;Hold (H): +10% return;Underperformer (U): -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,Gr. Floor, Mafatlal House,163, HT Parekh Marg,Backbay Reclamation

Churchgate,Mumbai – 400 020

[email protected]

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ICICIdirect Fortis-Wockhardt Deal