Malvinder Mohan Singh, chairman of Fortis Healthcare Ltd., attends a panel discussion in Bangkok, Thailand. (Photographer: Brent Lewin/Bloomberg)

Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles

The slide triggered in the shares of Fortis Healthcare Ltd. after troubles for its promoters, the Singh brothers, mounted has only made India’s second-largest hospital chain an attractive bet for analysts.

That’s because the possibility of an acquisition, debt reduction and valuations provide enough room for a rebound according to a few brokerage reports. That billionaire Radhakishan Damani, the owner of D-Mart supermarket chain, invested in the healthcare company has also been viewed by market experts as an endorsement of its value. Recently Damani’s investment vehicle Derive Investments bought 26.6 lakh shares at Rs 144.50 apiece.

Shares of Fortis Healthcare fell by nearly half since their last peak in May to a low Rs 106.7 this month before recouping some losses. The Bloomberg consensus target is Rs 196, an upside potential of 28 percent from the Feb. 20 price of Rs 153.45.

One brokerage, China’s Haitong Securities, estimates the stock could go as high as Rs 260. Haitong published this in November as a one-year target. As yet the analyst has not revised it.

Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles

Contrast the aggressive price targets set by brokerages with the troubles mounting at the company and for its promoters.

Market regulator Securities Exchange Board of India and other investigating agencies are reportedly examining accusations that the Singhs siphoned funds from the hospital chain and their financial services arm Religare Enterprises Ltd.

Also Read: India Is Said to Order Three-Month Probe Into Fortis, Religare

The brothers also owe Rs 3,500 crore to Japanese pharmaceutical firm Daiichi Sankyo after losing an arbitration launched by Daiichi and failing to appeal it successfully. Daiichi had sued the Singh brothers for concealing important information at the time of the sale of their pharmaceutical company - Ranbaxy India Ltd. As the litigation drags on the Supreme Court has barred the Singhs from selling assets but recently permitted lenders to offload pledged Fortis shares.

Also, Fortis is yet to announce its earnings for quarters ended September and December.

Yet, analysts are bullish on the stock. Here’s why…

Takeover Candidate

Companies like TPG Axon, General Atlantic, IHH, VPS Healthcare and Manipal Health have shown interest in acquiring Fortis, the Times of India and Livemint separately reported.

“With the Supreme Court ruling freeing up wider trading in the stock, we believe the potential for M&A around Fortis has returned,” said Shyam Srinivasan of Goldman Sachs in a recent note. “In our M&A framework, we continue to rank Fortis at 2, implying 15-30 percent probability that the company could be acquired.”

The bank assigned a 15 percent M&A component weight to the company, which can increase the target price to Rs 229 from Rs 171.

Debt Reduction

Fortis Healthcare has been reducing debt by selling off its international operations and focusing more on the Indian business. Its debt fell by half to Rs 625 crore in three years to March 2017.

Religare Health Trust Deal

The hospital company plans to buy back assets from Religare Health Trust for Rs 4,650 crore, funded via mix of debt and equity. That will help Fortis Healthcare save Rs 270 crore on service fees and Rs 75 crore on interest costs.

“We are positive on the plan, which can significantly simplify company structure, and eliminate uncertainty or lack of transparency in transactions between Fortis and RHT,” Saion Mukherjee of Nomura wrote. “The acquisition lowers complexity and makes Fortis a more attractive acquisition target.”

Diagnostic Business Demerger

The plan to hive off its diagnostic business that awaits regulatory approval will create shareholder value.

Fortis owns 56 percent in its diagnostic business SRL Labs Ltd., the largest organised player in India with four reference labs and a pan-India network of 310 clinical labs, 1,074 collection centers and 7,200 collection points. “The demerger will help to unlock value given the fact other listed peers like Dr. Lal Pathlabs Ltd. and Thyrocare Technologies Ltd. are trading at a significant premium,” according to a note by Param Desai of Elara Capital.

Valuations

Fortis Healthcare trades at a substantial discount to its peers amid promoter-related issues and concerns over pledged shares.

Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles
Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles

Superior Operating Matrix

Fortis makes more than peers for every operational bed. It also has superior return ratios.

Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles
Why Brokerages Remain Bullish On Fortis Despite Founders’ Troubles


Risks

While analysts are bullish, they still see risks to any possible acquisition from legal troubles. “We are unable to take a firm call on whether the Fortis founder family’s legal dispute with Daiichi Sankyo would have a bearing on Fortis’ ability to close this transaction,” Prashant Nair, a pharma analyst at Citi, wrote. Daiichi Sankyo has been successful in blocking the sale of founders’ stake and pledged shares and also the proposed demerger of its diagnostics business, he pointed out.