Fortis Healthcare needs to shore-up its equity base

Mumbai: A series of acquisitions has done no good to the Fortis Healthcare stock. In the past one year, the stock lost a 37% of its value. The sharp decline can be attributed to the growing stress in its balance sheet. The acquisitions have deteriorated the company’s asset profile and saddled it with a pile of debt. Intangible goodwill constitutes 52% of the Fortis Healthcare’s assets now. For its rival Apollo Hospitals, goodwill constituted just 3.2% of the assets in 2011-12.

The other issue that spooked the investors is the sharp rise in debt without a concurrent expansion in equity base. From less than Rs 1,000 crore in 2010-11, debt on the Fortis Healthcare’s books jumped to Rs 6,511 crore in March this year. Debt-equity ratio in the same period rose from less than 0.5 to 2 times.

The impact of rising debt levels was not felt on the company’s finances in the last fiscal. Finance costs rose by just 17.8% as the company borrowed more funds towards the end of the year. But as the current fiscal pans out, interest costs can surge, which could significantly crimp the company’s earnings. According to Anand Rathi estimates, finance costs will eat as much as 50% of the company’s operating profits.

To conserve earnings, either the promoters need to infuse fresh equity or the company has to sell new shares to the outside investors. The company has rightly sold new shares in its diagnostic chain, Religare Laboratories, for Rs 370 crore to two investors. The funds are expected to help the diagnostic chain shed some debt and help fund the expansion plans.

Likewise, the management should also concentrate on bringing new investors at the group level. According to Anand Rathi, the company is aiming to add more than 600 operational beds in the current fiscal. As the company integrates overseas assets, it will spend money on capacity expansion. While all these activities need fresh money, it cannot afford to take more debt.

Sriram Rathi and Sanjeev Chiniwar, of Anand Rathi add “On account of such high leverage, the interest-coverage ratio has slipped from 1.5x in FY11 to 0.7x in FY12, posing a threat to Fortis Healthcare’s ability to pay interest cost from operating profits. We expect interest coverage to improve to 1x in FY13 and to 1.6x in FY15. These are not very healthy figures.”

Overall, for the stock to be re-rated the management has to quickly raise fresh funds and reduce the debt-equity ratio.