Fortis: Faint-hearted can wait for more clarity

Fortis-RHT deal and core business growth will drive earnings

Fortis Healthcare has caught the Street’s attention after one of India’s prominent investors Radhakishan Damani’s firm bought half a per cent stake in the health care services provider.

On Tuesday, its share price surged 5 per cent, adding to the 40 per cent gain since its three-year low in early February.

For a stock that has been under pressure due to an overhang of litigations and an unfavourable court verdict in a ~35-billion arbitration case involving its promoters, Damani’s move is a positive. But, faint-hearted investors may still want the clouds to clear.

The resignation of promoters Malvinder Mohan Singh and Shivinder Mohan Singh has turned the tide for the company. As new members have been inducted into the board, the Street expects corporate governance practices to improve. A definitive agreement signed in February 2018 to acquire the entire portfolio of assets of Singapore-listed RHT Health Trust is another positive.

This consolidation would be earnings accretive for Fortis and reduce the holding company discount, experts said.

Fortis had said the deal would add ~2.70 billion to its operating profit, besides interest savings of ~750 million.

Analysts remained bullish on Fortis’ growth prospects. In a report last month, Motilal Oswal Securities said it expected the operating profit of the hospital business to grow over four times by FY19 (from FY16) on a low base and because of an improvement in margins of the diagnostics business. They had also argued for a multiple re-rating in the stock led by growth potential in the hospital business, asset-light expansion strategy and operating leverage gains in the diagnostics business.

On the flip side, on February 12, rating agency Icra put Fortis’ ratings on watch with negative implications. Its concerns included the credit risk profile being affected by large fees payable to business trusts, which are listed in Singapore, recent regulatory actions by the National Pharmaceutical Pricing Authority, and events surrounding the promoter group. The weaknesses highlighted by CARE Ratings include significant amount of liquid/short-term investments being parked in related parties, affecting the liquidity profile of Fortis, increased debt levels (2.25 times from FY16 to FY17), and pending litigation with respect to Delhi government’s ~5.03-billion penalty against Escorts Heart.

Fortis is yet to report its quarterly results and one needs to watch for any negative surprises, said G Chokkalingam, founder and MD, Equinomics Research & Advisory.

Further, with the Supreme Court allowing sale of pledged shares held by financial institutions, some of these finding their way to the market (adding pressure on stock prices) cannot be ruled out. For those wanting to acquire a piece of Fortis, they will have to live with volatility.