Fortis Healthcare turns focus on cost control and consolidation

With a new MD and CEO taking charge, beleaguered hospital chain Fortis Healthcare has turned its focus on cost control and consolidation, rather than expansion. Ashutosh Raghuvanshi, who was appointed at the helm a few months back, has drawn up a task to achieve mid-teen Ebitda margins. He is consolidating the operations through cost-control measures, starting work on pre-approved projects to augment capacities, and working towards improving occupancies.
 
This is a departure from Fortis' earlier plans that entailed, for example, retail expansion of its diagnostics arm SRL, especially in the southern markets.
 
The primary goal is to achieve 73-75 per cent occupancy levels at its hospitals after it slid to 65 per cent levels over the past two years. This is planned by adding new specialities (radiology and oncology, for example), improving market share in the cash market and also via infrastructure upgrade. "The company intends to save upwards of Rs 100 crore in operational efficiencies and lift Ebitda margins by about 600 basis points to 16 per cent by FY22," said Deepak Malik, analyst, Edelweiss.
 
The management has indicated to analysts in recent meetings that it aims to be a lean organisation, unlike the flab-laden outfit once run by its erstwhile promoters Malvinder Singh and Shivinder Singh.   A few months back too, Fortis Healthcare had indicated that it planned to expand the retail footprint of SRL. In fact, SRL CEO Arindam Haldar had said in Mumbai that the plan of setting up 100 collection centres in 100 days was on track and there was no change in the plan even after Malaysia’s IHH Healthcare's buying a 31.1 per cent stake in Fortis. 
 
However, sources indicated that the focus now has shifted to rationalisation — giving importance to centres reporting high revenue rather than expanding footprint. In an e-mailed response, Fortis said, "SRL continues to follow its strategy of enhancing its business performance and rationalisation is an ongoing process for optimising operation, which SRL continues to do. SRL diagnostics has a well-diversified customer mix including walk-ins, collection centres and hospital presence. Currently, SRL operates over 400 labs across India with over 7,000 collection points."
 
Analysts feel that rationalisation was inevitable. Fortis is among the lowest in terms of manpower productivity, noted Edelweiss. "This is primarily due to personnel costs, which include clinicians’ cost and other expenses, mainly promotional costs, which are also the highest among peers. Hence, the foremost task for management is to instil cost discipline, which is the focus area for the new CEO, who is targeting over Rs 100 crore in savings over the next 18–24 months," Malik said. He felt that Fortis Escorts Heart Institute in Delhi and Fortis Escorts Hospital in Jaipur are the hospitals where maximum improvement can be achieved as they generate single-digit margins.
 
Over the last few years, which have been difficult for the entire hospital industry, Fortis has faced its own challenges and as a result, the occupancy level declined from 75 per cent to 65 per cent and the Ebitda margin declined from mid-teens to less than 10 per cent (9.9 per cent in FY19).
 
However, recent efforts have yielded some results -- since January, Fortis has achieved cost savings of Rs 25 crore.  As for the hospital business, plans are afoot to commission the work in progress capacities. At its facility on Bannerghatta Road in Bengaluru, Fortis expects to start its oncology facility over the coming months, while at Noida unit, it expects to commission the liver transplant programme by the end of CY19. Meanwhile, it does not plan to expand beds anymore. With the bulk of investments being done, Fortis' capex is expected to decline to Rs 200 crore, of which majority will be towards maintenance, analysts noted.
 
IHH CEO to step down
 
Meanwhile, IHH Healthcare MD and CEO Tan See Leng will step down from his post on December 31 and will be replaced by a former IHH executive Kelvin Loh. Loh will join the group as CEO-designate and executive director on July 1 to undertake the transitionary process. Tan is set to complete his contract period (he was appointed in 2014 January for two years).  IHH is currently facilitating the exit of private equity players (who together own around 31 per cent stake) from SRL.
 
The Malaysian major won a bidding war to acquire Fortis in July last year and infused Rs 4,000 crore into Fortis to pick up a 31.1 per cent stake. Additionally, it put Rs 3,400 crore into an escrow account to initiate an open offer, which, however, is stuck due to a Supreme Court ordered status quo on the IHH-Fortis deal in December.