Will course correction help Fortis Healthcare?

Firm wants to cut debt, go slow on mergers and acquisitions. But margins could take a hit

Fortis Healthcare, promoted by billionaire brothers Malvinder and Shivinder Singh, has sold its Australian subsidiary, Dental Corporation, to Bupa Healthcare for Rs 1,548 crore. Fortis Healthcare International, a company that was privately owned by the Singh brothers, had acquired Dental Corporation in 2007. After Fortis Healthcare took over this company in 2012, Dental Corporation became a part of it. The Fortis management has said that the sale of the Australian company is meant to align the company with its strategic priorities and consolidate its Asian operations. But the sale was cheered by analysts for quite another reason: they see it as a serious attempt to reduce the debt on the company’s books and increase focus on Asia.

Fortis Healthcare has piled up debt of almost Rs 7,000 crore, largely on account of the acquisition of Fortis Healthcare International for $665 million. Say CRISIL Research analysts: “Debt ballooned to Rs 7,000 crore in the second quarter of 2012-13 from Rs 2,300 crore before the acquisition. and debt/equity moved to 2.2 in the year (from 0.3 in the previous year).” Apart from the sale of Dental Corporation, the company has listed Singapore-based entity Religare Health Trust, which has yielded Rs 2,200 crore, and sold a stake in diagnostic venture Super Religare Labs to raise Rs 370 crore. All these moves will help the company bring down its net debt from Rs 7,000 crore at its peak to about Rs 2,300 crore. Its net-debt/equity ratio at the end of 2012-13, when the Dental Corporation deal is expected to close, is likely to be 0.6.

Though these moves are in line with the company’s decision to reduce debt, they will have a significant impact on its bottom-line. Dental Corporation was amongst the most profitable businesses for Fortis; so its sale means lower profitability. Also, Fortis Healthcare had transferred some property assets to Religare Health Trust in its quest to follow an asset-light strategy. On the flip side, it will now have to pay lease rentals to Religare Health Trust for these assets. Both the measures could, therefore, impair Fortis Healthcare’s profit margins going ahead. “Fortis Healthcare will have to pay service fees for lease rentals as the hospital properties would be owned by Religare Health Trust. We believe that savings on interest would be completely offset by the cost of service fees,” Sriram Rathi and Sanjeev Chiniwar of Anand Rathi say.

Thus, the ebitda (earnings before interest, taxes, depreciation, and amortization) margins of Fortis are likely to decline from 14-15 per cent over the last few years to under 10 per cent in 2012-13. In contrast, the ebitda margins of Apollo are expected to improve from 16 per cent over the last few years to about 17 per cent in 2013-14 on the back of increasing occupancies, the pharmacy business’s higher contribution and economies of scale. Vishal Bali, group chief executive, Fortis Healthcare, says the sale of Dental Corporation is value accretive and that profit margins at the consolidated level could look up. “Given (our) strong footprint in India, which is a high-growth market, focus on operating efficiency and the fact that many hospitals are in the maturing phase, there is scope to improve ebitda margins,” says he.

Lacking synergies
One of the reasons for the purchase of Dental Corporation was that Fortis Healthcare could scale up the business and take it across other geographies. The Fortis Healthcare management now says that the Australian business was local in nature and, therefore, could not be leveraged across its hospital chain, and that’s why the decision was taken to sell it and focus on the Asia region. While this might be true, analysts say that there were little synergies in the first place and that the purchase in 2007 was an expensive one. Abhishek Singhal and Kumar Saurabh of Macquarie Capital Securities India believe that there were minimal synergies with Dental Corporation and the divestment is a step in the right direction. CRISIL Research analysts say, given the goodwill on the acquisition of the Australian company, the acquired assets came at a significantly high price.

The Singh brothers have believed in rapid global expansion through acquisitions to gain scale. When Malvinder was running Ranbaxy (the brothers sold it to Daiichi Sankyo of Japan in 2008 for almost Rs 10,000 crore), he would often claim that Ranbaxy has done the maximum overseas acquisitions amongst Indian groups, apart from the Tata group. Fortis Healthcare’s big moment came in March 2010 when it had acquired a little over 25 per cent in Parkway Hospitals for $650 million from TPG and gained management control. (Malvinder had announced that he would relocate to Singapore to run the premium hospital chain, while his younger brother, Shivinder, would steer Fortis Healthcare in India). But five months later, they had sold their stake to Khazanah, the Malaysian sovereign wealth fund, for a profit of $116 million. The exit had caught observers by surprise. The Singh brothers had coveted Parkway for long because of its service excellence, and were looking at synergies with their low-cost healthcare business in India.

Still, Fortis Healthcare has been aggressive in its approach to expansion both within and outside the country. The company, which had a single 300-bed hospital in 2000, has expanded to about 12,000 operational beds now, almost half of which have come into its fold through acquisitions. It runs 75 hospitals, over 600 primary care centres, 191 day care specialty centres and over 230 diagnostic centres in ten countries across the world (most of these are located in Asia).

Going up and down                                                              (in Rs cr)
	FY11	FY12	FY13*	FY14*	FY15*
Sales	1,496	2,984	5,980	5,217	6,163
% change (y-o-y)	59.5	99.5	100.4	-12.8	18.1
Ebitda	209	403	658	394	536
% change (y-o-y)	28.6	92.8	63.3	-40.1	36.0
Ebitda (%)	14.0	13.5	11.0	7.6	8.7
Core net profit	106	-3	-30	42	152
*Estimates Source: Citi Research

Going international
Of late, observers and analysts want to know what have been the real benefits of Fortis Healthcare’s diversification into markets outside India. The reason for its overseas presence, according to the Fortis Healthcare management, has been to leverage synergies across geographies and verticals. While there could be gains on the back-end from economies of scale, sharing know-how and from streamlining operations, the business model of healthcare presence in different markets is unusual. Says a healthcare analyst: “Most healthcare service brands tend to be localised (unlike a consumer product company) and the relative value of the brand in other markets is not high.”

Bali refutes this. “Given the potential, there is a great opportunity to leverage brands across Asia. One has to select the right vertical and meet local requirements,” he says. But there are signs the company is doing strategic course correction now. It will focus on its current expansions and consolidate its position. “We are going to stay away from mergers and acquisitions now. The focus is to consolidate and strengthen our position in the markets we are present in,” Bali says.