IPO Analysis- Fortis

In need of a lifeline

Sandeep Singh

Posted online: Tuesday , April 17, 2007 at 1455 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

Think of a house, any house, that you like. It is good looking, it has a great location, and you can afford it. However, it is disputed property and you can buy it on the condition that you could lose it — and your money — if the dispute isn’t resolved in your favour. Would you still buy it? If you answered ‘no’, by the same logic, you shouldn’t subscribe to the Fortis Healthcare IPO.

The problemsIts promoters might own one of India’s best pharma companies (Ranbaxy), Fortis might be an early-mover in an industry set to go places (healthcare), but all that counts for nothing given the legal crossfire the company is caught in. Although the disputes are mostly not Fortis’s doing, it might have to pay a hefty price for unfavourable rulings.
The nerve centre of most of these troubles is its 90 per cent acquisition of Escorts Heart Institute and Research Centre Limited (EHIRCL) — the company that runs the capital’s finest heart-care institute by the same name and more — from the cash-strapped Escorts Group in September 2005 for Rs 585 crore. For the nine-month period to December, EHIRCL accounted for 61 per cent of Fortis’s revenues. Fortis could lose all this, and more, if the case verdicts go against it.
EHIRCL was initially set up as a charitable society. Subsequently, the Rajan-Nanda promoted Escorts Group merged it with a non-charitable society. They incorporated the merged entity as a company with limited liability, and then sold it to Fortis. Anil Nanda, the estranged brother of Rajan Nanda, has filed a case in the Delhi High Court, to declare void these financial transformations — and by extension, the Fortis buyout of EHIRCL.
Then, the Delhi Development Authority (DDA), which owns the land on which the Delhi hospital stands, has cancelled EHIRCL’s lease. The DDA’s contention is that it leased the land to EHIRCL on soft terms as it was a charitable society, but it has since then become a commercial company. The case is in the Delhi High Court and the next hearing is on May 14. The DDA has filed a similar case against another hospital that Fortis manages.
Lastly, EHIRCL has been slapped with a notice by the Delhi High Court for not providing free treatment to a specified number of poor patients — one of the terms laid out by the DDA to give land. The court has also asked EHIRCL to pay back-dated penalties (estimated at about Rs 6 crore for this year alone).
Logically, if the rulings go against EHIRCL, Escorts should pay. The offer document says there are ‘breach of warranty’ clauses in the agreement, but Fortis might still have to bear the liability, in part or full. Not only can the EHIRCL sale fall through, Fortis might not even recover its money.
The prescriptionAs a shareholder, that’s a huge ‘if’. Of the Rs 154 crore Fortis has raised through a private placement and the Rs 423-505 crore it intends to raise from you, Rs 467 crore has been earmarked to repay loans taken to buy EHIRCL. Now, as a shareholder, you face four scenarios.
The cases drags on. As it is, Fortis has been going slow in integrating EHIRCL’s operations with its own. If it is unable to save costs or expand as it would like to, you lose.The buyout falls through, and Fortis doesn’t get all its money back. You lose, as the IPO funds are used unproductively.The EHIRCL buyout falls through, but Fortis gets its money back. Neutral. Fortis loses a top asset, but at least it can expand on its own terms.The verdicts favour Fortis. You gain, as Fortis gains indisputable control over one of India’s best hospital chains, which it can leverage.
Much hinges on what happens to EHIRCL. On its own, Fortis, which started in 2001, has done reasonably. It runs 11 hospitals and 15 satellite and heart command centres, mostly in the North. In the last two years, its revenues (excluding EHIRCL’s) have doubled to Rs 100 crore in 2005-06. However, it’s making losses (even at a combined level) and will continue to for a while, as it is in the investment phase and this business has a long gestation period — a hospital takes three to five years to break even.
With or without EHIRCL, Fortis has ambitious plans: build and acquire specialised and multi-speciality hospitals across India, as well as enter into operations and management contracts.
Since it is early days for Fortis, it’s difficult to impute a value to the business. Despite being in red, the company has set the price at Rs 92-110. Apollo Hospitals, the only listed private hospital, is currently quoting at a PE of 42. That’s stiff, considering its revenues have grown at a CAGR of 16 per cent and net profit at 17 per cent. Apollo’s revenues are seven times that of standalone Fortis, about twice that of the Fortis-EHIRCL combine (See table: Teething troubles). But there’s a question mark over that combine. And that’s good reason to give this issue a miss.

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