Analysts cautious on Fortis Healthcare post SC verdict; stock tanks 18%

Apart from a forensic audit in the Fortis-IHH deal, the Supreme Court on Thursday also announced a jail term of six months for Malvinder Singh and Shivinder Singh in the Daiichi-Fortis case.

Shares of Fortis Healthcare (FHL) plunged 18 per cent to Rs 255.75 on the BSE in Thursday’s intra-day trade on of heavy volumes, after the Supreme Court (SC) announced a jail term of six months for Malvinder Singh and Shivinder Singh in the Daiichi-Fortis case. That apart, a forensic audit has been ordered in the Fortis-IHH deal.

The stock hit a 52-week high of Rs 324.80 on Monday, September 19, 2022 and touched a 52-week low of Rs 219.80 on June 20. At 11:29 am; FHL was trading 17 per cent lower at Rs 258.70, as compared to 0.79 per cent decline in the S&P BSE Sensex. The average trading volumes on the counter jumped over five-fold, with a combined 21.6 million equity shares having changed hands on the NSE and BSE.

“The development has put a question mark on the Fortis-IHH deal. The outcome of the forensic audit will decide the future course of action for the company. Until then, the stock can remain under pressure. That said, the segment Fortis operates in remains robust and the company is on a strong footing. The fall presents an opportunity to those who have an appetite for risk to buy and hold the counter from a medium-to-long term perspective,” said A K Prabhakar, head of research at IDBI Capital.

Meanwhile, the board of FHL had at its meeting held on July 13, 2018, had accepted the binding bid made by IHH. FHL – an IHH Healthcare Berhad Company – is a leading integrated healthcare services provider in India and is one of the largest healthcare organizations in the country with 26 healthcare facilities and 4300 operational beds (including O&M model) as of March 31, 2022.

Going ahead, the company plans to add 1,500 beds over next four years, mainly in their existing clusters. Deepening presence in existing locations would help leverage higher economies of scale in terms of both cost & revenue drivers and benefiting from cross-leveraging clinical and non-clinical resources.

The healthcare sector is competitive, analysts believe, as increasing healthcare providers (newer and existing hospitals, low-cost nursing homes, etc.) try to establish themselves among patients. That said, in the last couple of years, major hospital groups, according to Jefferies, have seen a major jump in their profitability and have reduced their debt levels leading to very comfortable leverage ratios.

“Hospital M&A news has picked up pace in the last few months, but unlike the past, this time hospital groups now have the balance sheet strength. All three of our coverage firms, Fortis, Apollo, and Max had in the past five years reached net debt/EBITDA of over 3.5x and in FY22 Max and Fortis number came below 1x while Apollo was at 1.2x. FY22 net debt/EBITDA figures for all major Indian hospitals have significantly improved vs pre-Covid year of FY20,” wrote Abhishek Sharma and Dhawal Khut of Jefferies in a recent note. CLICK HERE FOR FINANCIAL PERFORMANCE

The sharp fall in Fortis Healthcare, according to Gaurang Shah, head investment strategist at Geojit Financial Services, will take a long time to recover. “Investors will be better off staying away from this counter till clarity emerges on the outcome of the forensic audit and the fate of Singh brothers. In this segment, Apollo Hospitals offers a better risk-reward and I would recommend buying this stock,” he said.