Fortis Healthcare: Q3FY13 Numbers Rest Uneasily On Equity Dilution

Gurgaon-based Fortis Healthcare has reported a 26-fold rise in its net profit to Rs 705 crore for Q3FY13. The hospital major, which has diversified its operations into countries outside of India as well, has reported a 154% growth in its consolidated revenues to Rs 1539 crore. On the bourses, the stock had surged 13% in the pre-opening session today (February 13, 2013) but then cut most of the gains as the company has posted a loss at the net level for the quarter if one excludes the exceptional gain of Rs 973 crore.

In the period under question, the company sold its stake in its international arm Religare Health Trust (RHT). The RHT IPO in the Singapore stock exchange fetched it a total amount of about Rs 2260 crore. The company has reported Rs 973 crore as a net exceptional gain from this amount, and hence, the net profit number isn’t that fascinating.

The high growth in the topline is also not sustainable, as it has sold its 64% stake in Australian dental firm Dental Corporation Holdings (DC) on December 17, 2012. This business accounted for the 30% of its topline in the December 2012 quarter. The 11% growth that the Australian business has shown on a sequential basis is also commendable, but the divestment of this business seemed to be the top priority for the company in its quest to reduce its debt burden. The divestment of this business would fetch the company additional AUD 276 million (about Rs 1554 crore) which would be used to de-leverage the balance sheet.

On the EBITDA front, Fortis Healthcare has reported a decline of about 400 basis points which is indicative of its poor operating performance. The interest cost has also surged 2.6x to Rs 158 crore, which cannot be ignored.

We expect that the company may report good set of numbers in Q4. It is expecting to close a deal for the sale of DC to Bupa, which will once again give them another set of one-time exceptional gains in March 2013. Therefore, we can expect to see further exceptional gains in that quarter as well. However, one should keep an eye on how the operating profits move. The disappointment on that front in Q3 suggests an overall poor performance.

We had carried the analysis of Fortis Healthcare in our magazine DSIJ (Issue No. 22, dated October 21, 2012), where we had advised avoiding the stock. At that time, it was trading at a price of Rs 104, and currently, despite the Q3 results, the share price is Rs 106. This indicates that investors will have to wait more for higher returns (if any).

Besides, the company has bought other businesses as well by issuing debt and is now selling them to reduce debt, which reflects the management’s inability to capitalise on these businesses. It also hints at the fact that there was either no synergy in the businesses or they were trying to bite off more than what they could chew. How these acquisitions have created value for shareholders should be something that the management should explain.

We maintain our call to avoid this scrip.