Ever since the change in management, Fortis Healthcare Ltd’s main appeal has been its business recovery and the valuation catch up opportunity it provides. The good news is that the September quarter results reinforce this view.

Not surprisingly, the stock touched a new 52-week high on Thursday on the National Stock Exchange, as operating earnings registered strong growth. Utilization levels or occupancy rates rose, driving up profitability. Ebitda margin expanded to 15.7%, up from 12.5% in June and 6.6% in the year-ago quarter.

Graphic by Satish Kumar Sharma/Mint
Graphic by Satish Kumar Sharma/Mint

Agreed, revenue growth of 6.3% was tepid. However, notable improvement in utilization level from 69% in the year-ago quarter to 72% in the September 2019 quarter, meant operating earnings more than doubled year-on-year. Note that utilization level for the June quarter was at 66% and, sequentially, operating earnings have increased by 34%. Expectedly, the hospital business has been recovering. Average revenue per occupied bed improved from last year even as the average length of stay of patients reduced. This implies better case, or patient mix. Elimination of business trust fee pursuant to the acquisition of hospital assets lowered expenditure. But even otherwise, the company is optimizing costs, supporting earnings.

The diagnostic arm fared satisfactorily, reporting an improvement in profitability.

While realizations moderated slightly, business volumes expanded. Number of tests rose 4.8% from a year-ago.

It helps that measures to improve the balance sheet are bearing fruit. Net debt is a fifth lower from the year-ago. With leverage improving, the company is beginning to see improvement in credit ratings. This has lowered interest costs. Finance expenses dropped 42% last quarter.

With the management continuing its focus on cost and asset optimization, there is scope for further improvement in operating metrics. Further, the valuation gap with Apollo Hospitals Enterprise Ltd means the stock continues to be on the investors’ radar. The pace of improvement in operating performance and the Supreme Court’s decision on the long-pending open offer by the new promoter are the key things to watch out for.

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