Fortis' domestic growth story may be intact, but global plans hinge on reaction to Parkway's bid. The partial offer by the Malaysian government's investment arm, Khazanah Nasional, could give it control over Singapore-based Parkway Holdings.
The bid has put a spoke in Fortis Healthcare’s plan to become a global healthcare provider. Khazanah has offered to buy 313 million shares in Parkway, or a 27.5 per cent stake, that will take its total holding to 51.5 per cent.
Will Fortis counter the bid?
While the Fortis Management is tight-lipped about its next move, some analysts are skeptical whether Fortis will be open to paying that kind of money (estimated at about Rs 3,800 crore) just three months after it paid Rs 3,118 crore for a 23.9 per cent stake in the Singapore-based hospital chain.
However, others believe the company's improving debt-to-equity ratio gives it the flexibility to do so, but with further equity dilution.
Analysts say while Khazanah had the flexibility to launch a partial offer, Fortis – given the Singapore takeover code rules – may have to make a full offer, which will significantly increase its costs. An option for Fortis will be to sell out, which will lead to gains of about Rs 300 crore. Believing this will be the course of action, investors pushed Fortis Healthcare shares up 6 per cent after the partial offer was announced in Singapore on Thursday.
| GREENFIELD PROJECTS | |
| NCR | 800 |
| Ludhiana | 275 |
| Kolkata | 414 |
| Ahmedabad | 200 |
| Gwalior | 150 |
| Kangra | 100 |
| Peenya | 120 |
| Total by FY13 | 2,059 |
| Current capacity | 6,000 |
| Source: Company | |
| HEALTHY GROWTH | ||
| in Rs crore | FY09 | FY10 |
| Occupancy (%) | 67 | 74 |
| Revenue* (Rs lakh) | 75 | 83 |
| Sales | 630 | 937 |
| Operating profit | 85 | 140 |
| Net profit | 20 | 69 |
| *per bed Source: Company | ||
The other choice for the company could be to stay on as a strategic investor. Neither of the two options seem to make a lot of sense, given the investment it has already made in the company.
So, one can expect a price war now for control of Parkway.
Implications
If Khazanah manages to get control, it could give Fortis’ bigger rival – Apollo Hospitals – a major advantage. The Malaysian fund, which has a 13 per cent stake in Apollo, could ask the Indian company to run Parkway's network of 16 hospitals and 3,400 beds on its behalf. Apollo could expand the relationship it has with Parkway beyond the two hospitals in Kolkata and Hyderabad, which the two are jointly developing.
While the Apollo management has made it clear it is not seeking equity investments, managing a network as large as Parkway could give it a substantial presence in the Asean region, as well as additional income.
Domestic growth story
Irrespective of what happens in Parkway, Fortis has had a good run in the domestic market, achieving its eighth straight quarter of higher revenues and profits. The company has chalked out an ambitious plan of adding over 2,000 beds over the next three years, which will increase its capacity to about 8,000 beds.
With its focus on the high-margin cardiology speciality segment, which gets it 42 per cent of revenues and which is growing 35 per cent annually, profitability is likely to improve. Operating profit margins, which rose 150 basis points year-on-year to 15 per cent for 2009-10, are likely to touch 21 per cent in 2011-12 as higher occupancy levels and scale benefits kick in.
Liquidity concerns
With the company in expansion mode and cash flows under strain, investors are worried about the company’s ability to fund projects and pay its gross debt of Rs 4,200 crore with debt-to-equity ratio at 2.8. The management, however, believes the Rs 450 crore raised through foreign currency convertible bonds, conversion of detachable warrants to the tune of Rs 1,387 crore and Rs 380-crore preferential issue, along with cash flows, should bring the debt-to-equity ratio to a manageable 0.67 by the end of June. This will improve Fortis' flexibility to raise additional resources to make a counter offer for Parkway.
At Rs 143.50, the stock trades at price-to-earnings ratio of 28 times its 2011-12 earnings per share of Rs 5, while its larger rival trades at 25 times. Expect returns of about 25-30 per cent over the next one year.
