IHH in the driver's seat, analysts expect Fortis to recover in 3 quarters

IHH is planning to use the funds infused in Fortis to finance the Religare Health Trust acquisition

With Malaysia’s healthcare giant IHH at the steering wheel, analysts expect India’s second-largest hospital network, Fortis Healthcare (FHL), would soon be on the road to recovery. 

The occupancy rate is expected to stabilise at around 70 per cent that would fuel a mid-teens margin by the year-end. “Recovery is going to take three more quarters. Going into 2019-20, things will start looking good on a sustainable basis,” said Deepak Malik of Edelweiss Securities. 

The company has seen a rebound in its occupancy levels in the second quarter to 69 per cent from 62 per cent in the previous quarter (Q1FY19). Occupancy levels have been slipping for the past few quarters. From 75 per cent in Q2FY18 it fell to 65 per cent in Q4FY18 and dipped further in the first quarter of this fiscal. 

Analysts point out that the average revenue per occupied bed (ARPOB), a key operating metric for hospitals, has remained more or less stable in the past few quarters. In Q2 this year, it grew to Rs14.9 million compared with Rs14.6 million in the corresponding quarter last year. 

Some of the group hospitals such as Fortis Memorial Research Institute (FMRI), one of the largest facilities of FHL, continue to generate high ARPOB (Rs28 million). 

IHH is planning to use the funds infused (Rs40 billion) in Fortis to finance the Religare Health Trust (RHT) acquisition. Singapore-listed RHT owns the hospital infrastructure of Fortis, which are rented out to FHL for a service fee. The trust costs alone are around Rs4 billion per annum. Almost 30 per cent of the operating costs of the hospital business are on account of the RHT cost. 

IHH has already put a transition team in place. With the longtime CEO Bhavdeep Singh putting in his papers recently, IHH-Fortis is also looking for a replacement. 

Meanwhile, the new owner is focussing on improving the operational metrics of the beleaguered hospital chain. Earlier this week, the company said it would review the capex requirements of Fortis and study the overall funding requirements of the hospital chain. 

Edelweiss noted that Fortis’ revenue and Ebitdac declined 5 per cent and 25 per cent year on year in the last quarter, respectively. Ebitdac refers to Ebitda before net business trust costs. Ebitda stands for earnings before interest, depreciation, tax and amortisation, and is an indicator of a company's operating profitability. 

Fortis' Ebitda margins have started showing signs of recovery on a sequential basis. At 12.5 per cent, the Q2FY19 Ebitda margin was down from 16.7 per cent on a year on year basis. However, it did better from a 7.7 per cent margin the previous quarter.

Signs of revival

• Company sees a rebound in occupancy levels in Q2 to 69% from 62% in the previous quarter
• Average revenue per occupied bed (ARPOB) remains more or less stable in the past few quarters. In Q2, it grew to Rs 14.9 million compared with Rs 14.6 million in the corresponding quarter last year 
• Fortis’ Ebitda margins are showing signs of recovery on a sequential basis. At 12.5%, Q2FY19 Ebitda margin was down from 16.7% on a YoY basis. However, it did better from a 7.7 % margin the previous quarter
• The firm has done well in terms of gross margins (at 80%) in FY18, the highest in its peer group