Infusing money to fund growth plans and pay back debt is good strategy.
Since the promoters are the major shareholders in Fortis Healthcare with a stake of close to 75 per cent, most of the Rs 1,000 crore to be raised through the proposed rights issue will be brought in by them.
Although the equity dilution will be fairly large — at around 60 per cent if shares are issued at the average price of the last six months which is around Rs 65, it’s not such a bad thing because the company needs an infusion of capital to finance its growth plans. It plans to have 40 hospitals by 2012. Moreover, Fortis also has around Rs 450 crore of debt and Rs 250 crore of preference capital on its balance sheet which it wants to retire.
Shareholders who subscribe to the issue could be in for a long wait. Hospitals are a long gestation business and involve high fixed costs in the initial phases, which is why operating margins of hospitals tend to be lower in expansionary phases.
For instance, Apollo Hospitals, which now has 8000 beds, saw its margins contract by nearly 400 basis points in 2003 to just over 13 per cent after it had opened new hospitals in Vizag, Aragonda and Bilaspur. Of course, operations in smaller cities do fetch relatively lower margins but it’s a fact that in the initial stages, running costs (especially wages), are high and revenues take some time to flow in. So, while Apollo has posted a compounded average revenue growth of 30 per cent between 2000-2007, margins have tended to fluctuate.
However, according to a study by Goldman Sachs, Fortis may do better than Apollo in the long run; by 2013, the average revenue per bed that Fortis is expected to generate Rs 35 lakh, should be far higher than that of Apollo’s, estimated at Rs 21 lakh.
This is mainly because Apollo will be present in more tier II and tier III cities and have a less favourable mix of general, specialty and super-specialty beds. In the six months to September 2008, Fortis’ revenues grew by 17.7 per cent. Net profit was Rs 11 crore compared with an operating profit margin of 10.3 per cent.
