Large equity-raising plans are usually a concern for investors. More so, if the company completed a rights issue recently that followed an initial public offering done in 2007. Fortis Healthcare’s stock price, however, touched a 52-week high after the firm announced its plans to raise around Rs1,250 crore to meet growth opportunities when they arise. The amount is approximately one-fourth its current market capitalization.
The firm has done better this fiscal. In the December quarter, consolidated income rose 44% to Rs235 crore though a sharp jump in other expenditure affected its operating profit margin. At the operational level, occupancies rose while patients spent fewer days in the hospital, a desirable combination for any hospital. Net profit more than tripled due to lower interest costs and higher other income.
Graphic: Yogesh Kumar / Mint
The Wockhardt Hospitals Ltd acquisition effect is only partially reflected in the financials since 17 December.
The full impact will be seen in the current quarter, both on sales and profits. The acquired hospitals’ revenues were estimated at Rs310 crore but profitability will become known only after the March quarter results are announced. In its fiscal 2009 annual report, Fortis stated a target of 40 hospitals and 6,600 beds by 2012. After including 10 hospitals (of which two are under construction) it acquired from Wockhardt and including its own projects, it is on course. But Fortis seems to have raised its target, looking for more buys.
Setting up large multi-speciality hospitals takes a long time. Also, its initial acquisitions have made it confident of efficient post-merger integration and squeezing efficiencies to improve profitability, key to benefiting from a buy.
Acquiring, upgrading and expanding an existing hospital is a better option than building a new one. Fortis has not disclosed any plans, but a positive market reaction reflects in investor confidence in its merger and acquisition abilities.
While these skills have been tested, it needs to now deliver on performance and improve profitability. Operating profit margins in the December quarter were just 1.6%. Eventually, an improvement in margins and return on capital employed is what will deliver superior returns for shareholders.
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