How did IHH Healthcare manage to nurse Fortis hospitals back to health

After a bruising bidding war four years ago, Fortis has moved to pare its debt and expand modestly

After Malaysian major IHH Healthcare won a hard-fought bidding war to acquire a 31.1 per cent stake in Fortis Healthcare in July 2018, the beleaguered hospital chain is finally off the critical list.

The hospital chain has not only pared debt, improved its net worth and become profitable (see chart), but it has also managed to expand modestly. Its stock price has recovered, too, from Rs 140-145 levels on the BSE in August 2018 to Rs 300 levels now.

So how did IHH manage to nurse Fortis back to health? Soon after it acquired its stake, IHH infused Rs 4,000 crore into Fortis, and put Rs 3,400 crore into an escrow account for an open offer for another 26 per cent stake. The open offer has been stuck since 2018 on account of a legal battle involving another former group company.

IHH Healthcare had paid $1.1 billion to acquire its 31 per cent stake in a bidding process overseen by an independent board. But the mandatory open offer was stayed by the Supreme Court after Japanese conglomerate Daiichi filed a plea against it over a separate controversy involving the drug company, Ranbaxy. Daiichi had challenged the Fortis-IHH deal to recover a Rs 3,600-crore arbitration award it had won in a Singapore tribunal against Fortis’ (and Ranbaxy’s) erstwhile promoters, the brothers Malvinder Singh and Shivinder Singh.

In the first 100 days after the Malaysian major invested in Fortis, Kelvin Loh, managing director and CEO, IHH Healthcare Berhad, told <Business Standard> in a recent interview, “we wanted to bring in operational efficiencies, keep costs low, have global procurement initiatives, reduce our financing costs, share best practices, clinical practices, etc.”

Ravi Rajagopal, chairman of Fortis Healthcare, added that out of the Rs 4,000 crore that came in, Rs 300 crore was spent on paying debt and around Rs 3,700 crore went into buying back assets from RHT. The Singapore-listed RHT owned Fortis’ assets and the latter used to pay it clinical establishment fees, part of the Singh brothers’ attempt to create an asset-light model. Kunal Randeria, analyst with Nuvama Research, pointed out, “The buyback of assets helped in an annual savings of Rs 270 crore.”

“The buyback was done for economic reasons — the effective interest costs that were there was around 12-13 per cent...after we bought back the assets, our effective interest cost came down at one point to 6-7 per cent,” Rajagopal said, adding, “At one point, the interest savings annually was Rs 150-200 crore. The shareholders were all extremely positive that we have done the right thing after the buyback happened.”

Meanwhile, he added, “The Rs 1,000-1,200 crore of capex was all internally generated cash from profits. This is in addition to paying down debt of Rs 1,000 crore in the last four years.” All of this meant that operational metrics — occupancy levels and average revenue per occupied bed (ARPOB) — improved, too. “About two years back, around eight hospitals in the Fortis network had sub-10 per cent margins. Now that is down to around five hospitals or so, and around 10-11 hospitals have margins in excess of 20 per cent,” Randeria said.

But the focus on debt and asset buybacks meant that Fortis’ plans to add close to 250-300 beds annually for the next two to three years has been more or less stagnant.

In addition, IHH’s inability to infuse fresh capital until the open offer goes through has constrained growth. “From a Fortis point of view, the frustration is that we are not able to participate in M&A activities…our footprint and our presence could have been a lot bigger, had we been not constrained by capital,” Rajagopal said, although the chain is expanding the number of beds in seven of its hospitals.

After a challenging FY21 when overall occupancies dipped to 55 per cent across the Fortis network with people postponing elective surgeries, travel restrictions and lockdown hit patient footfalls, FY22 saw a turnaround. Occupancies improved to 63 per cent despite the first and fourth quarters of FY22 being impacted by the Delta and the Omicron waves. The hospital business roughly contributes 75 per cent of its overall revenues.

Though the first four years have seen an encouraging recovery, the prognosis from analysts is that much hinges on the open offer going through, not least because of the fear of more skeletons tumbling out of the Singh brothers’ closet. As a Mumbai-based analyst put it, “Fortis is being run very professionally now. Had IHH had its way, it could have expanded its network significantly. The outlook is indeed positive, but we are awaiting clarity on the legal issues that plague the company.”