Fortis: Treating debt hangover by injecting cash

After a rough patch, last three months have been better with stock tracking broader markets, largely after the company sold stake in its international operations

Fortis Healthcare’s strategy of selling stake in its international assets to lower debt is drawing to an end, given Monday’s announcement of sale of Quality HealthCare. The high debt has been one of the major concerns on its stock ever since Fortis acquired Fortis International Limited from the promoter group. Hence, the stock has underperformed the broader indices for quite some time.

However, the last three months have been better with the stock tracking broader markets, largely due to the company selling stake in its international operations. The latest such move pertains to the sale of its Hong Kong-based unit Quality HealthCare to insurance company Bupa, taken well by the Street. After rising 6.5 per cent intra-day on Wednesday, the stock closed with marginal gains at Rs 104.90 versus a 0.3 per cent fall in the Sensex. This adds to the good momentum seen in the past five trading sessions, wherein the stock has risen eight per cent. And, if things go by plans, there could be further gains.

The sale will help fetch Fortis $355 million (Rs 2,188 crore based on Wednesday’s exchange rate of Rs 61.63 to a dollar) and will help lower debt.

The total debt at the end of FY13 was Rs 6,471 crore, while cash and bank balances stood at Rs 512 crore and investments at Rs 1,187 crore.

In May, Fortis had completed divestment of Dental Corporation, Australia for $270.38 million (Rs 1,452 crore) again to Bupa Australia Health. The proceeds were used to cut debt. The company in its June quarter presentation had observed the balance sheet de-leveraging was on track and net debt was Rs 3,283 crore (net debt to equity at 0.7 times), lower by Rs 2,487 crore in the March quarter. After divestment of the Australian assets, Fortis divested Fortis Hoan My, Vietnam, for $80 million, which will see its net debt to equity fall to 0.6 times.

Shree Ram Rathi at Anand Rathi Institutional Equities sees this third divestment of Quality Healthcare as positive. Analysts at Macquarie too see it in positive light, as it will deleverage the balance sheet and bring back complete focus to domestic business. The transaction by them is valued at a healthy valuation of 25 times trailing enterprise value/earnings before interest, taxes, depreciation and amortisation (Ebitda). After the transactions, they see net debt coming to Rs 600 crore, from Rs 6,100 crore at its peak.

Quality Healthcare had generated revenues of Rs 960 crore, with an Ebitda of Rs 85 crore in FY13, by analysts. Ebitda margins stood at 8.8 per cent. This meant the business was less profitable compared to Indian operations. During the first quarter, the India Hospital business had reported Ebitda margins of 10.6 per cent, significantly lower than estimates of 13.5 per cent. Analysts at Nomura attributed the lower margins to start-up losses at the Gurgaon facility. Even otherwise, given Quality Healthcare would fetch Rs 2,188 crore (interest cost savings of about Rs 165 crore), the sale should be earnings accretive to the extent of 10-15 per cent.

Meanwhile, for the quarter ending September, Rathi expects contribution from international subsidiaries to reduce to 26 per cent (of total revenues) from 52 per cent, year-on-year, due to divestment of Dental and Hoan My, Vietnam. However, he estimates hospitals to grow 18 per cent year-on-year, led by an increase in operational beds, higher occupancy and steady rise in average revenue a operating bed. Super Religare Laboratories (SRL; diagnostics business) is expected to grow at a steady rate of 15 per cent year-on-year, led by the rise in diagnostic centres and greater number of patients. After the Quality Healthcare sale, the India revenues will be 95 per cent of the total.

Macquarie expects hospital business revenue to grow at 20 per cent per cent compound annual growth rate over the next three years on the back of new bed additions and better realisations, and margins to improve on the back of higher operating leverage and as new hospitals mature. SRL margins are also expected to improve on the back of cost efficiency. Thus, Macquire’s analysts have raised target price to Rs 135. Rathi will review the target price after the September quarter results and till then maintains his target price of Rs 105. The consensus target price, from Bloomberg, is Rs 108.