Change in strategy for Fortis India
Singh brothers aim to make company asset-heavy again
THE two Singh brothers of the healthcare industry in India are working towards making Fortis Heathcare Ltd asset-heavy once again.
This is a major shift in strategy and many in the healthcare world are wondering why the need to do so when just five years ago they parked the assets into a trust and listed it on the Singapore Stock Exchange.
Fortis executive chairman Malvinder Mohan Singh says they have their own reasons for the change in strategy, which include “cost and efficiency’’ and “boosting of revenues.’’
The move is also a way to get new investors into the fold and Malvinder says he “welcomes’’ any partner-investor that wants to be part of the Fortis growth.
Reports out of India say they are talking to some “overseas investors and plan to sell their stake via the issuance of fresh shares.’’
Could one of those investors be Malaysia’s own IHH Healthcare Bhd or its parent Khazanah Nasional Bhd?
Malvinder was in town early this month to receive the “Most Influential Business Leader in Asia’’ award by India’s Economic Times, which was presented by Prime Minister Datuk Seri Najib Tun Razak at the Asian Business Leaders Conclave in Kuala Lumpur.
Malvinder’s brother in the same business is Shivinder Mohan Singh, the executive vice chairman of Fortis.
Speaking on the sidelines of that event, he says “anyone who wants to be part of our business on what we are going to build is welcome,’’ adding that “I am not going to comment on any individual or institution.’’
IHH had earlier said it was keen to expand from eight hospitals in India but when reports emerged in India in mid-year of purported talks, IHH poured cold water on it.
Fortis was set up in 2001 and used to own hospital assets even in Asia but sold out some years ago, including a stake in Parkway Hospital Group to Khazanah.
The days of Fortis going out of India are also over, says Malvinder, as he believes there is robust growth in the healthcare sector in India to tap into and for him “Fortis is an India-centric company and healthcare is a local business.’’
“The last few years we decided to exit those assets and put all the money back into India,’’ he says.
He believes the growth and demand supply gap in India for healthcare services are very extensive even though there are a lot of investments happening in healthcare, by them and others, including from foreign and private equity players.
“You need to have the ability to predominately serve the local market as there is a viable business sitting in your local environment. I think there are enough good healthcare companies in Malaysia and Singapore and the existing players are doing well. I have great regard of what they do and how they do it, and they are a model to follow,’’ he adds.
But five years ago the brothers spun off the health assets into a trust, Religare Health Trust (RHT), which was subsequently listed on the Singapore Stock Exchange and the IPO raised S$510.7mil. RHT was then the largest IPO of a business trust sponsored by an Indian company in Singapore in 2012, and the second-largest primary listing in Singapore in that year.
Fortis has an indirect 29.76% stake in RHT, whose shares were unchanged on Friday at 0.82 Singapore cents.
In the middle of last month, Fortis made a proposal to buy back all of RHT’s assets for 46.5 billion rupees (US$711mil). The deal, includes 11.52 billion rupees of debt and it would lead to improved profitability with service fees being removed as the hospital company-Fortis integrates all the assets into its fold. “The reason we are restructuring at this point in time is because our sharehold- ers, analysts and investors have shared their perspective that has given the current growth rate of the company, and its cost structure in terms of service fees, it is probably better served if the assets were bought back, especially so with falling interest rates,’’ he said.
By so doing, Malvinder says “we will be close to doubling our operating profit.’’
He believes the valuation and value enhancement that will happen for Fortis would probably be more beneficial and optimal in this model (asset heavy) versus (asset light) we have held for the last many years.’’
A report says the deal would add Rs 270 crore to its Ebitda (annualised net service fees based on June quarter figures it paid to RHT), besides interest savings of Rs 75 crore due to the acquisition of 49% in Fortis Hospital.
Some analysts say the deal is positive as it will strengthen Fortis balance sheet.
The share price of Mumbai-listed Fortis Healthcare is inching upwards this week but since Jan 2 this year it has fallen from 182.40 Indian rupees a share to Friday’s mid-day trading at IND 146.40, although it did hit a high of INR 230.90 in May.
Fortis is valued at a PE ratio of 17.94 times based on its price of INR146.60 a share. It has a market capitalisation of INR7 6.41billion. For the financial year 2016-2017, Fortis reported an 8.7% jump in consolidated total income to Rs 4,574 crore.
This includes revenue of Rs 4,508 crore from India operations and the remaining from international operations. Its net profit rose 15-fold to Rs 426 crore from Rs 28 crore because of a one-time gain, says a report.
The purchase of the RHT assets will be funded through a combination of equity and debt or quasi-debt, and experts believe the purchase could be a precursor to getting investors into Fortis.
Shareholders of RHT will be paid, and Fortis is one of them. With the assets taken out, is a de-listing of RHT on the cards?
“The business trust is managed by a separate team, which is totally independent, so I cannot make any comments,’’ Malvinder said.
Growing to over 9,000 beds
India’s healthcare industry is growing at a compounded annual growth rate of 23%. It’s worth is expected to reach US$160mil by year end and rise to US$280bil by 2020.
Malvinder says as it is, demand outstrips supply.
Fortis is the second largest hospital chain with over 5,000 beds, ahead of Manipal Group with slightly lower number of beds, and Apollo Hospitals is leader in India’s private healthcare market with over 10,000 beds. IHH-Khazanah used to own stake in Apollo but has since divested it.
“The Indian healthcare market is exceedingly fragmented. There are two national players, Fortis being one of them, a handful of regional and local players. Though there is a lot of healthcare infrastructure, mostly nursing homes with 30-35 beds each. In India, having 5,000 to 10,000 beds is a very small number,’’ he says.
The growth plan is for Fortis to have over 9,000 beds over the next few years based on organic growth. In the course they want to improve on the quality of care they deliver, serve patients more effectively and holistically, upgrade medical programs, get new technology and have large spreads of therapeutic areas to cover more medical specialities.
“We have good lot of work ahead of us as there is un-met demand. The healthcare industry is changing, be it in India or emerging markets and medical tourism is an area of growth for us,’’ he says.
India was experiencing 22-25% growth in medical tourism and the industry is expected to double its size from US$3bil (as at April this year) to US$6bil by 2018. Medical tourist arrivals in India increased more than 50% to 200,000 in 2016 from 130,000 in 2015, says a report.
For Fortis, medical tourism accounts for about 10-12% of its overall revenues.
He adds that the “growth opportunity and potential is so significant in India that over the next many years our energies and focus and time will be totally dedicated and devoted to strengthening and building Fortis within India.’’
He is not opposed to the idea of mergers and acquisitions as the market consolidates, so long it “strengthens and creates value for Fortis.’’
He added that with development and lifestyle changes, there are huge shifts in the way people look at healthcare, it is shifting towards wellness and prevention.
Despite all the vision to grow Fortis, his biggest challenge is getting access to medical talent, although he is not alone as that is an issue in India, he claims.
“Looking from the need of the country versus the talent available, there is clearly a short supply of doctors and nurses to serve patients and therefore we need more colleges and degrees coming out at a faster pace,’’ he says.
Amid all that, Daiichi Sankyo had sought damages on the grounds that the Singh brothers had withheld crucial information when they had sold Ranbaxy for INR$4.2bil in 2007.
The Delhi High Court in March this year restrained Fortis’ promoters from selling any assets without its permission.
However, a report quoting a spokesman saying that any restructuring that occurs at the level of the Singhs’ two largest operating companies, Fortis Healthcare and Religare Enterprises Ltd, won’t be impacted by the ongoing proceedings in the Delhi High Court because the court order is only directed at the holding companies.
How the Singh brothers are going to move going forward will be watched by the investing community.