Fortis Healthcare plans acquisitions, may opt for neutral brand name

We have taken a calculative view that at least for SRL, we have moved to the Agilus brand, and we have successfully completed that last year, said CFO of Fortis Healthcare

Delhi-headquartered hospital major Fortis Healthcare is open to making acquisitions of hospitals over 250-300 bed size as a part of its strategy to grow at a faster clip and may also opt for a neutral brand name soon.

Ever since Malaysia’s IHH Healthcare picked up a 31 per cent stake in 2018, Fortis has been going slow in terms of bed additions and focusing more on consolidating its business operations, repairing its balance sheet and improving profitability. Having turned around the operations, Fortis is now embarking on an ambitious 2,000-bed expansion plan over the next 3-4 years. It is open to making acquisitions (it recently acquired a 350-bed hospital in Manesar) and is also considering shifting to a neutral brand distinct from Fortis.

The current brand name Fortis (as well the earlier diagnostic business brand SRL) was owned by ex-promoter entities.

“We have taken a calculative view that at least for SRL, we have moved to the Agilus brand, and we have successfully completed that last year. Regarding Fortis, the matter is in the court, and we are watching it very carefully. Our action will depend on the outcome of court proceedings,” said Vivek Kumar Goyal, chief financial officer of Fortis Healthcare.

“We are open to various options, including retaining the Fortis brand, and maybe shifting to the Parkway brand or maybe a neutral brand. So, all the options are open for us right now and we are exploring those options very carefully and we'll come to the market once we finalize on these,” he added. The Parkway brand is owned by IHH Healthcare.

Goyal said that Agilus is a neutral brand that is now fully owned by the company. “We've recently rebranded the company and launched this new identity, which was met with considerable success. We've managed to quickly establish Agilus as a well-recognized and reputable brand in the market,” he felt.

The Fortis brand is owned by the ex-promoter entities, and the brand license agreement has expired, Goyal explained. “We have been accounting for brand royalty fees. These fees, calculated at 0.25 per cent of our revenue are in accordance with the terms of the last expired agreement,” he informed.

“As and when we transition into a neutral brand, these charges will go away. For instance, with the shift to Agilus, a neutral brand, we've already eliminated these charges. Similarly, if Fortis decides to adopt a neutral brand, we'll see the same financial benefit. However, should Fortis choose to use the Parkway brand, a new royalty payment structure will need to be negotiated and agreed upon with Parkway, the specifics of which will be determined at that time,” he elaborated.

Meanwhile, the hospital major is focusing on expanding the bed count. In the last 3-4 years, it has added 400-500 beds.

Fortis is planning to add over 2,000 beds in the next 3-4 years. Fortis has been investing Rs 350 crore or so every year, and this fiscal it has already invested close to Rs 500 crore. In all, Fortis has invested Rs 1,500 crore in the last five years, and a major portion of this capex till date has gone into medical equipment, maintenance capex, etc. It has also invested in brownfield capex (especially in existing facilities where they have additional land parcels). Around Rs 200 crore every year has gone into maintenance capex.

Goyal said that in the current financial year they are targeting Rs 750 crore capex. This year they have a plan to add 250 beds or so. On top of that, it is also investing in modern equipment – MR LINAC at Gurgaon, robotics programs, gamma-knife, cath labs, MRI machines and PET CT machines, etc.

For the next three years, Fortis’ capex would be around Rs 600 crore on average every year (of which maintenance capex would be around Rs 200 crore each year).

Most of this would be funded from internal cash flow generation. “We have a very healthy cash flow generation, and we are reducing debt every year. In fact, we have started paying a dividend from last year onwards. Cashflow is not an issue, and we will be able to meet this entire brownfield capex and maintenance capex requirement from our internal accruals,” Goyal said.

As of September 2023, Fortis had a net debt of around Rs 393 crore. This has come down from around Rs 1,500 crore at the time IHH picked up the stake in Fortis. Goyal said that since they wish to accelerate their capex spend, the debt levels would remain at Rs 350-400 crore levels.

The current debt numbers involve the amount it has invested in the recent acquisition in Manesar, where Fortis has acquired a 350-bed capacity by paying Rs 250 crore. “I think that in future debt requirements will only come in case we are doing some big acquisition,” Goyal mentioned.

He explained that Fortis’ initial focus and priority was to achieve brownfield capex because brownfield expansion is cheaper compared to making an acquisition. The per-bed cost roughly works out to be around Rs 1-1.25 crore in brownfield expansion, compared to Rs 2.5-3 crore per bed for an acquisition or greenfield expansion in a metro city. Moreover, brownfield projects start generating cash flow immediately.

“We are actively looking now at the acquisition of things. We have started with Medeor Hospital (Manesar) and there are other acquisition opportunities which we are exploring and if it fits in our overall scheme of things, we will definitely go for acquisition also,” Goyal said.

Apart from clusters or geographies where Fortis has a strong presence (NCR, Mumbai), if there is any opportunity in the Tier-II cities that make good synergy with existing hospitals, Goyal said, they will definitely explore those too for acquisition targets. Fortis, however, would not go for acquisitions smaller than 250-300 beds.

“Anything below that does not excite us and we would like to go for the larger facilities rather than smaller facilities. There are facilities available where the operational bed may be 200-300 beds but there is an opportunity to grow further. With our type of hospital chain, it makes sense to operate on a hospital which is 500 plus beds,” he added.

Talking about Fortis’ turnaround journey, he said the company was in bad shape in terms of debt overhang, ex-promoter issues, and the operations were not up to the mark. Radiology, a high-margin business, was outsourced, and this was resulting in operational issues and financial losses to the company. There were contracts which needed revision, new vendors were brought in. All this resulted in an operational change and higher operating margins. “The company was struggling for capital. We prioritised capital expenditures on the equipment side, and this gave confidence to the doctors and led to overall patient satisfaction.