India focus to drive Fortis' fortunes

In an effort to reduce its debt pile further, Fortis Healthcare sold its 65 per cent stake in its Vietnam business, Fortis Hoan My Medical Corporation, to Viva Holdings Vietnam for $80 million or Rs 470 crore (Rs 4.7 billion).

The company, which has debt of about Rs 6,000 crore (Rs 60 billion), is expected to bring it down by nearly half by the end of FY14 on the back of this latest deal, as well as completion of the sale of Dental Corporation, Australia.

Consequently, the debt to equity ratio is pegged to fall from 1.1 currently to below 0.6 times.

The company’s group chief executive officer, Vishal Bali, said the latest deal was in keeping with current priorities in allocation of resources and further strengthening of the balance sheet.

According to the company, the transaction (analysts estimate it at 14 times FY13 EV/Ebitda) is EPS accretive and will help lower the net debt to equity ratio to less than 0.6 times.

The company had acquired the Vietnamese outfit a couple of years ago for $60 million.

Over the past year, the company has taken several steps to deleverage its operations, which include stake sale in Dental Corporation, Australia, for Rs 2,200 crore (Rs 22 billion), the Vietnam business sale (Rs 470 crore or Rs 4.7 billion), equity through IPP (Rs 320 crore or Rs 3.2 billion), IFC FCCB ($55 million), stake sale in diagnostic chain SRL for Rs 370 crore (Rs 3.7 billion) and the listing of Religare Health Trust (Rs 2,200 crore or Rs 22 billion) at the Singapore Stock Exchange.

Given the deleveraging benefits, most analysts have a buy on the stock, with target price of Rs 115-125.

Given the current price of Rs 90, there is an upside of 25

per cent from these levels.

Domestic focus and turnaround? The various asset sales bring back focus to domestic business and on improving profitability.

Say Macquarie analysts Abhishek Singhal and Kumar Saurabh, “The recent asset sales coupled with deleveraging of the balance sheet, will bring back the focus towards domestic operational performance, the fundamentals of which remain strong.”

About 70 per cent of FY14 estimated Ebitda is expected to come from the domestic business, as compared to about 50 per cent currently.

The focus over the last year and a half for the company has been to consolidate, pursue an asset light model and improve returns from current operations.

These steps are likely to bear fruit over the next year.

Analysts at Axis Capital say deleveraging (resulting in lower interest cost), coupled with a higher number of maturing beds and better margin at SRL Diagnostics, will drive a turnaround in FY15.

The company’s interest outgo for FY13 which was Rs 634 crore (Rs 6.34 billion), is expected to come down to Rs 250 crore (Rs 2.5 billion) in the current financial year.

Axis estimates the company will make a loss of Rs 13 crore (Rs 130 million) in FY14 before hitting profits in FY15 of Rs 105 crore (Rs 1.05 billion).

The research firm estimates margins for the hospitals business (at 13 per cent for the March quarter) to improve to 15 per cent on the back of better operational performance. Diagnostic business margins improved 480 basis points sequentially to 15 per cent in the March quarter on higher capacity utilisation.

With most rollouts complete, diagnostics margins are expected to improve 100 basis points.