With Singh Bros out, can Fortis Health be a re-rating candidate?

Fortis Healthcare has been in news for some years now. First, it was the Rs 2,562-crore arbitration award against promoters Malvinder and Shivinder Singh in the Ranbaxy case. Second, there were reports of alleged financial irregularities to the tune of Rs 473 crore at the health service provider.

But much has flowed under the bridge since. The Singh brothers have resigned from the board and their shareholding in the company is now drastically down to 0.77 per cent, from 34.40 per cent earlier.

That makes it a re-rating contender, according to a few analysts, who believe that the company still is fundamentally strong and could throw up a Satyam-like opportunity.

Post invocation of shares, Yes BankNSE -0.04 % has emerged as the largest shareholder in the troubled firm, with around 15 per cent stake. This is after the lender sold 1.12 crore Fortis shares in the open market, representing 2.17 per cent stake of the company.

Banks and financial institutions such as Yes Bank, Axis BankNSE 0.76 % and Indiabulls have the right to sell their shares to a third party that can eventually become the promoter of the healthcare company, said the analysts.

“When there are scam-related issues regarding promoters and misgivings, but the underlying fundamentals of the business are robust, that’s a huge money kicker,” said Sanjiv Bhasin, EVP-Markets, IIFL.

Drawing a parallel to the Satyam case that rocked the Street in January 2009, Bhasin believes that it is just about getting one’s act together.

“If you had picked Satyam at the heat of the moment, when it was underlying the worst of rhetoric at Rs 10, you stood to make a lot of money. Fortis has poor management and shrouded financials, which has given you the price what you are getting. So, if you can weather the storm and live through the rhetoric, it may turn out to be a huge upside story,” the expert told ET Now.

The healthcare services provider reported a consolidated net loss of Rs 19.10 crore for the December quarter, down from Rs 23.61 crore loss in the preceding period.

Even as the management is confident of Rs 473 crore loan recovery, doubts remain over its ability, given the financial health of the promoter entity, noted brokerage Motilal Oswal Financial Services.

“With the current promoter holding as marginal, banks/financial institutions may look to find a new investor, which could lead to stock re-rating. We have valued the hospital and diagnostic business based on 20 times and 18 times H1 FY20E EV/Ebitda, respectively. We cut Ebitda by 26 per cent/9 per cent for FY19/20E as we build in slower margin ramp-up,” the brokerage stated.

Despite all this buzz, the company has managed to hook investors. Last month, ace investor Radhakishan Damani’s Derive Investments purchased 26.59 lakh shares, 0.5 per cent, in the company at Rs 144.50.

“The company has become a board-led company and the executive decisions will henceforth have to be taken by the board. With Singh brothers’ holding just around 1 per cent, institutional and retail holdings are what matters now. In fact, the only step left is the company is to declassify Singh brothers as promoters and that would end the process,” said Shriram Subramanian of InGovern.

Subramanian though does not see an investment case here. “Damani is of course a big investor but one should not just follow large investors. Retail investor could have better options out there. It is not that Fortis is the only listed company. Go for something that you trust,” Subramanian said.

Link: Economic Times- March 20, 2018