Fortis Healthcare Ltd’s investors, rather strangely, seemed unfazed by the loss it incurred and the accompanying disclosures. The company’s FY18 revenue and Ebitda (earnings before interest, taxes, depreciation and amortization) both fell, and write-offs led to a massive 934 crore loss. The most charitable explanation is that they’re just praying for the bids to go full speed ahead, as the uncertainty is over.

But a lowering of valuations is a very real risk, given the revelations thrown up. Also, these results are unaudited. It remains to be seen whether the audited numbers throw up more nasty surprises.

First, consider the business performance. The company’s sales fell by 3.1% over a year ago in the March quarter, and were nearly flat in the full year. Its hospitals business saw sales decline by 4.9% in the quarter, while the diagnostics business grew by 4.5% over a year ago.

The hospitals business’s decline was due to the management being distracted by the promoter-related issues and the sale process, price control on stents, funding constraints affecting new hospital openings, and its north India hospitals suffering due to adverse patient-related incidents. Worryingly, profitability declined both in the quarter as well as for the full year.

Some of these adverse trends should be temporary. But there are more serious problems to be tackled. Fortis reported huge exceptional losses of 833.5 crore, of which 445 crore pertained to provisions for inter-corporate deposits (ICDs) given to related entities.

The investigation has revealed that these ICDs were not part of normal treasury operations and were not specifically authorized by the board of Fortis’s subsidiary, Fortis Hospitals Ltd. Since FY17, these ICDs were being rolled over after issuing a cheque at the end of a quarter, and then the ICD would be reissued at the start of the next quarter. The report says these borrowers could be classified as related entities. That is pretty damning.

Also, Fortis Hospitals assigned these ICDs to a third party in September 2017. That assignment was cancelled in January 2018. This third party has filed a suit against various entities, including Fortis, for recovery and has also claimed ownership of the brands Fortis, SRL and La Femme. The litigants have even claimed to have a right to invest in Fortis as part of this transaction. That’s one huge skeleton to come tumbling out of a closet crowded with them. Without the brands, which are licensed to Fortis by the promoter group, the valuation could go lower.

The other main item that swelled the exceptional loss figure is a 281 crore charge due to impairment of goodwill.

The company desperately requires funds. Its working capital is under strain, with creditors’ balance rising by a third despite business remaining flat in FY18. Its cash and bank balances have dwindled to 220 crore compared to 546 crore a year ago. Inability to complete capex is restraining growth.

Now that its FY18 results are out and the four bidders are doing due diligence, the sale process should move ahead. The underlying business is what could make the bidders persevere, despite the plethora of problems. That’s what is also keeping Fortis’s shares afloat at current levels, and despite all the unsavoury disclosures its shares rose by 0.9% on Wednesday.

Many of these issues are likely to linger. The risk is one or more bidders dropping out, not having the stomach to deal with what increasingly looks like a horror story.

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