Fortis: Seeking alternative options

Temporary setback after Singapore watchdog blocks sale of unit

Fortis Healthcare’s stock fell marginally after the Competition Commission of Singapore rejected its move to sell its Singapore asset RadLink Singapore,  a diagnostic and imaging company, to Medi-Rad Associates for S$137 million (Rs 620 crore). Fortis was planning to use the proceeds from the sale to repay foreign currency convertible bonds worth Rs 820 crore — Of these, Rs 637 crore is due in May. While the development means a possible delay in the sale of this asset and thus debt reduction, Fortis is exploring alternate strategic opportunities. It also intends to divest its Singapore-based multi-speciality medical hospital in FY16, after which it will be a purely Indian play. Currently, Indian operations account for 98 per cent of its consolidated revenues, excluding RadLink.

Thanks to its strategy of pursuing an asset-light and domestic-driven strategy, Fortis’ net debt over the past two years is down from Rs 5,352 crore to Rs 1,301 crore. Most of the assets have been transferred to Singapore-listed Religare Health Trust, in which Fortis Healthcare owns 28 per cent stake. Fortis, in turn, takes these on lease basis from the Trust.

Profit margins, especially in the hospital business (78 per cent of consolidated revenues), are rising. For the December 2014 quarter, margins for the segment came in at 15 per cent before business trust cost (rentals), up 60 basis points (bps) over the September 2014 quarter and 260 bps over the year-ago quarter. The improvement is due to a reduction in lower-margin government/high working capital business and unviable operations in smaller towns. In addition to healthy growth in its top 10 hospitals, which account for three-quarters of revenues, analysts expect new facilities at Bengaluru, Chennai, Ludhiana and expansion to drive revenue growth. Weak season and rationalisation of centres in the December quarter saw the diagnostic segment report lower than estimated sales growth of 13 per cent at Rs 179 crore. Margins at 18 per cent were down 250 bps sequentially and up 69 bps on a year-on-year basis.

While things are improving on the operating front, analysts prefer Apollo Hospitals to Fortis Healthcare because of the former’s more robust cash generation and better execution. However, given the government’s push on health insurance coverage, tax benefits, recent increase in foreign direct investment in insurance, companies such as Fortis Healthcare should benefit in the long term. Investors should await Fortis’ consistent performance before taking exposure, following the 36 per cent spurt after Rakesh Jhunjhunwala bought one per cent a month ago.