The Fortis Healthcare stock spurted seven per cent on Monday to close at Rs 116.65 after the company announced the sale of its 64 per cent stake in Australia-based Dental Corporation (DC) for about Rs 1,550 crore. The company is planning to use the proceeds from the sale to retire its debt and focus on expanding its business in Asia. The deal, expected to be closed by March of 2013, will help bring down its debt-equity ratio to 0.6 from 1.1 levels (net debt of Rs 4,500 crore) as on September 2012.
Analysts say the company had spread itself too thin, with diverse assets and picked up too much debt in the process, in turn hurting it on the bourses. After halving from Rs 170 levels in July 2011 to Rs 82 in end-2011, the stock has languished in a narrow band. Say Abhishek Singhal and Kumar Saurabh of Macquarie Capital Securities India, “The complexity involved in the integration of various acquired discrete international businesses and its stretched balance sheet was weighing on the company’s valuation.”
However, going ahead, while FY14 financials could be hit on absence of Dental Corporation financials, the focus back on India will help. Nitin Agarwal of IDFC Institutional Securities says that while there will be pressure on the revenues and margins will come off quite a bit, the deal is directionally a positive one given that the domestic story is more valuable, the management is cleaning up the balance sheet and is looking at an asset light model.
| GROWTH, LEVERAGE TRADE-OFF | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 2,983.0 | 5,879.0 | 5,105.0 |
| % change y-o-y | 101.1 | 97.1 | -13.2 |
| Ebidta | 400.0 | 642.0 | 400.0 |
| % change y-o-y | 769.6 | 60.5 | -37.7 |
| Net profit | 72.0 | -189.0 | 34.0 |
| % change y-o-y | -41.9 |
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At the current price the stock is trading at EV/Ebidta of 16 times its FY14 estimates. Given Monday’s jump, the stock is quoting at a premium to its Asian peers, but at a discount to its larger domestic peer, Apollo Hospitals. While this indicates that there are little gains from these levels in the near-term, analysts are advising to ‘buy’ on dips given the change in the company’s strategy.
DC sale: No synergy, but…
While the deal will help bring down debt, the primary reason for the sale of the dental business it had acquired two years ago for about Rs 1,000 crore was that it could not be scaled up and cross-leveraged beyond Australia and New Zealand. The company says that the purpose of the acquisition was to replicate the business model from their home regions to other markets in Asia but despite efforts could not seed the model in other Asian markets in which the group has presence. Macquarie analysts say there were minimum synergies from DC to Fortis’ current portfolio, thus the divestment was a step in the right direction.
…it will mean lower sales, profitability
While the Street has welcomed the move, a few analysts think the move is not a smart one given the Australian business was contributing about 30 per cent of consolidated revenues, 40 per cent of Ebitda and was among the most profitable in its portfolio of services with Ebitda margins upwards of 18 per cent. Say Siddhant Khandekar and Krishna Kiran Konduri of ICICIdirect, “While the deal will bring down the debt equity to 0.6, it will squeeze the consolidated Ebitda margins even further as DC was fetching much higher margins and was a substantial part of international portfolio. Note that the transfer of assets to Religare Health Trust (RHT) has already put pressure on the margins due to hefty services fee.”
Banking on India
Positively, with most of the capex behind and given the hospitals coming online over the next couple of years (increase in number of beds from 4,600 to 6,600 in four years), the focus will now shift to consolidating its presence, especially India, which is estimated to now contribute over 70 per cent to the company’s FY14 estimated operating profit. Given the low base, high growth potential and increasing healthcare spends, most analysts are positive on the Indian healthcare sector.
Crisil estimates that Fortis’ hospitals business in India is expected to post revenue growth of 20 per cent on the back of growth from mature hospitals as well as contribution from new hospitals, while diagnostics sales should see a jump of 23 per cent aided by higher utilisation over the next two years. Any tie-up with existing or new hospitals to run them for a fee will only add to growth rates.
