Fortis Healthcare Ltd’s June quarter may seem like a sideshow with investor attention centred around IHH Healthcare Berhad completing the acquisition of a 31% stake in the hospital chain, now that Fortis shareholders have approved the preferential allotment to IHH.
The transaction should shortly see ₹ 4,000 crore flowing into Fortis’s account, giving it enough capital to run its daily operations and to complete the acquisition of its assets from a Singapore-based business trust. The completion of the preferential allotment will also see IHH take the driver’s seat, with the right to appoint two-thirds of the board. That’s really when the acquisition should start showing its results.
Investors should keep a watch on any change in the top management. Only time will tell whether it will be business as usual, or IHH will make significant changes in how the hospitals are run and its expansion plans. It, however, seems unlikely that IHH will invest ₹ 7,349 crore, including the open offer, for it to be business as usual.
IHH may also go on a clean-up drive after a thorough inspection of the hospitals business, more so, considering the questionable transactions that have come to light. This may result in provisions that could scar profits. While this is not certain, considering all the questionable transactions that have come to light, it does not seem an outlandish possibility.
Also remember that the pending matters being investigated by regulators still remain. Therefore, some short-term volatility in Fortis Healthcare’s financials may continue.
The June quarter results also show that IHH has a lot of work to do. Fortis Healthcare’s revenue declined by 9.9% from over a year ago and by 4.1% sequentially, attributable to a decline in the hospitals business. Its diagnostics business showed growth of 2.1%.
Even in the March quarter, the management had blamed liquidity concerns and challenges on other fronts for the hospitals business to underperform. The controversy surrounding overcharging by private hospitals also appear to have affected occupancy. Also, management attention had been diverted to the governance-related controversies and how it affected the process of getting a new investor on board.
However, July and August have seen occupancy levels improve, from 65% in the March quarter and 62% in the June quarter to 66.9% and 69% in July and August, respectively. This should result in higher revenue growth. The firm is targeting 70% occupancy levels by the end of the fiscal year.
The June quarter also saw total revenue decline by 10% over a year ago and its Ebitda (earnings before interest, tax, depreciation and amortization) fell by 84.2%. If you add back the amount Fortis pays as rent to the business trust that owns some of the hospitals, then Ebitda fell by 50.6%. It incurred pre-tax losses of ₹ 90 crore, higher than March quarter’s loss of ₹ 72 crore.
Once IHH lays out its growth plans, Fortis’s shareholders will get a clear direction of where the company is headed. Of course, the settlement of its pending regulatory matters will also count.
The results offer nothing to shareholders to improve the dreary outlook on valuations. Fortis shares were trading at ₹ 146, a discount to the ₹ 170 per share valuation, at which IHH is buying the controlling stake