From around the  ₹220 levels in 2017, Fortis shares almost halved in 2018 as corporate governance issues came to light at the company (Mint file)
From around the 220 levels in 2017, Fortis shares almost halved in 2018 as corporate governance issues came to light at the company (Mint file)

Once bitten, twice shy: Fortis Healthcare investors wary of rewarding performance

  • Fortis shares lost 4.8% over the past year even as the company saw a change in management and fund infusion to help it tide over its liquidity crunch
  • However, the fiscal year FY19 ended on a positive note with the core hospital business showing signs of stability

Typically, investors factor in an expected future improvement in performance into current stock prices. In Fortis Healthcare Ltd’s case, they are taking time to reward it for an improvement in its prospects that has already occurred.

Fortis shares lost 4.8% over the past year even as the company saw a change in management and fund infusion to help it tide over its liquidity crunch.

Importantly, the fiscal year FY19 ended on a positive note with the core hospital business showing signs of stability. Revenues at the hospital business grew 5.8% in the March quarter after six consecutive quarters of declines.

Further, the company appointed as its managing director and chief executive officer (CEO) Ashutosh Raghuvanshi, who has a proven track record of running the Narayana Hrudayalaya Ltd hospital chain. Raghuvanshi has emphasised on plans for profitability improvement measures in a meeting with analysts.

The strategy is two pronged. While focussing on improvement in asset utilization, the management plans to achieve cost efficiencies of as much as 100 crore. “Management’s first goal is to achieve 73-75% occupancy, from the slide to 65% over the past two years, by adding new specialties like interventional radiology and oncology; upgrading existing infrastructure; and improving market share in the cash market," analysts at Edelweiss Securities Ltd said in a note after meeting the new CEO.

Still, the recovery in the March quarter and the management commentary did little to revive the stock. The lacklustre reaction underscores the apathy towards the stock. From around the 220 levels in 2017, the stock almost halved in 2018 as corporate governance issues came to light at the company. They now trade at 134 a piece.

Concurrently, as the healthcare sector faced turbulence (due to pricing caps, tax changes and demonetization) stocks such as Fortis Healthcare fell-off the investor radar, says an analyst. But with the sector in the recovery phase, reflected in improvement in financial performance of Apollo Hospitals Enterprise Ltd and Narayana Hrudayalaya Ltd, Fortis Healthcare should soon follow suit, he says.

Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd expect the recovery to be gradual even as they see steady improvement in financial performance, thanks to a favorable base. “We think the disruptions are now easing and the financials are likely to record a gradual improvement as asset utilisation and occupancy rise," Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note.

Perhaps investors are awaiting the Supreme Court’s verdict on the new promoter IHH’s open offer. The apex court is expected to take-up the case in this month. If approved in the proposed form (open offer price of 170 per share), then the current market price offers good arbitrage, points out analysts at Edelweiss.

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