Fortis to add 6000 beds from inorganic, brownfield expansion

As evening turns into night, Gurugram’s skyline lights up outside Dr Ashutosh Raghuvanshi’s window at Fortis Healthcare’s corporate office. Raghuvanshi exudes the quiet confidence of the seasoned cardiac surgeon that he is, but his scalpel of choice today is not surgical steel. As MD and CEO of Fortis Healthcare, Raghuvanshi’s strategic vision is at work, pulling the once-ailing healthcare giant back from the brink of insolvency.

Just five years ago, Fortis Healthcare was headed for the operation theatre with a clutch of issues—operational ones and legacy issues left by its former owners that led to legal battles. IHH, the Malaysian healthcare major now in control of Fortis, had a troubled entry.

But despite a shaky start in 2018-19, with IHH taking over on November 13, 2018, and then giving the helm to Raghuvanshi on March 18, 2019, and the unprecedented chaos of the Covid-19 pandemic that followed, upsetting routine operations at all hospitals, Fortis Healthcare has been showing signs of recovery.

Revenues and profitability are up; debt is down. Today, it has 27 hospitals and 4,500+ operational beds. Before IHH took over, Fortis closed 2017-18 with a loss of Rs 934.42 crore on total revenue of Rs 4,560.81 crore. Thanks to the leadership of Raghuvanshi, Fortis closed 2022-23 with a profit of Rs 633 crore on total revenue of Rs 6,298 crore. For the first nine months of the current financial year (2023-24), Fortis reported a profit after tax of Rs 442 crore on total revenue of Rs 5,107 crore.

Putting the past behind
For years, it seemed that Fortis would not shed the hangover created by its erstwhile promoters, brothers Malvinder and Shivinder Singh. Daiichi Sankyo, the Japanese pharma major, claimed the Singhs had shortchanged it when they sold their pharma firm Ranbaxy Laboratories to it in 2008. Ranbaxy’s factories ran afoul of US FDA standards, leaving Daiichi with the bill. It shelled out $500 million in a settlement with the FDA and bailed out by selling Ranbaxy to Sun Pharma in 2014. But Daiichi now wanted to recover costs from the Singh brothers, so it sued them in court and won. The Singhs did not pay up. In early 2018, the brothers lost control over the management of Fortis, and eventually its ownership after banks and financial institutions sold shares pledged to them by the Singhs for loans. In November 2018, after a year of negotiations, IHH Healthcare came aboard with a 31% stake, having bagged Fortis for around Rs 4,000 crore via an allotment of preferential shares.

Daiichi, still suffering from the side effects of the Ranbaxy pill, saw its chance and accused the brothers of diverting funds. Sebi stepped in following media reports of the diversion of funds and directed Fortis to take steps under law to recover amounts to the tune of several hundred crores from the Singhs and their related entities, while directing the brothers to stay away from the hospital chain. Now, the Supreme Court stayed the IHH open offer in response to the Daiichi challenge and sought a response from Fortis on Daiichi Sankyo’s plea to restrain Fortis from transferring Rs 4,000 crore to RHT Health Trust. Daiichi aimed to recover the Rs 2,500 crore arbitration award won in a Singapore tribunal against the Singhs that the brothers had refused to pay.

In September 2022, the Supreme Court said transactions involving Fortis were prima facie bona fide, but sent the matter back to the Delhi High Court, holding that the high court could consider appointing forensic auditors if it deemed it appropriate. The Singhs were sentenced to six months’ imprisonment for alleged financial irregularities during the share sale. The matter is sub judice.

Life must go on
With most issues resolved or close to resolution, IHH has overhauled Fortis by bringing in new faces, streamlining operations, and trying out patient-centric initiatives.

“When we arrived, things were quite unstable. The hospital’s credibility, vendor relationships, and public perception were largely negative, both with the press and patients,” says Raghuvanshi, who was brought in by IHH from Narayana Health (where he had spent over 18 years) to steer Fortis. “Financially, things weren’t much better. Mistrust lurked within the organisation, with people wondering what went wrong, who was responsible, and if the new ownership would bring insecurity,” he recalls. “When I came aboard, the environment was one of fear and distrust. There were pros and cons. I took time to understand the people and issues, but I also got a clean slate to implement necessary changes.”

IHH Group CEO Prem Nair says the company is making strides in the Indian healthcare market, particularly through Fortis. “India is a critical part of our global strategy, and we are dedicated to elevating healthcare standards, improving patient care, and increasing accessibility to world-class medical services across the country,” he says. The Raghuvanshi-led team created a portfolio rationalisation strategy that saw Fortis exiting the Chennai market by selling its two loss-making facilities—Fortis Vadapalani in July 2023 to Sri Kauvery Medical Care (India) and Fortis Malar in February 2024 to MGM Healthcare. This helped improve profitability and allowed for better allocation of resources.

Beds, beds, and more beds
Fortis Healthcare’s hospital business accounted for around 80% of its Ebitda, reporting an occupancy rate of 67% (going by the numbers for 2022-23). The rest largely came from its diagnostics business. In FY23, hospital business revenue increased by 19.8%, and margins expanded to 16.9% from 15.4% in FY22. The company’s net debt-to-equity ratio was a healthy 0.04x.

But is this turnaround enough to draw investors? A December 2023 report by DAM Capital, an equity-focussed investment bank and institutional equities platform, says the Fortis stock has underperformed its peers in the last three years, delivering a 37% CAGR or compound annual growth rate, while peers Max Healthcare, Narayana Health, Apollo Hospitals, and Medanta have reported CAGRs ranging from 43% to 122%. Fortis also has a weaker margin profile, trading at a lower forward EV/Ebitda multiple (22x) than its peers’ 28-30x range.

Raghuvanshi remains optimistic. “Investors should be very interested in our company for the simple reason that despite all these legal overhangs, our financial performance has been continuously improving. On top of it, we have a very visible growth of more than 2,000 beds, almost 50% of our current capacity over the next three to four years.” The company has differentiated strategies for Category A, B, and C hospitals, focussing on optimising performance and Ebitda margins. “We decided to increase capacity in all hospitals. Some had space for additional beds, while others required new blocks. These projects are on track, and the resulting scale will boost profitability,” says Raghuvanshi.

Digital is king
Fortis Healthcare’s digital initiatives—from online appointments and consultations via the website to the Fortis app and digital campaigns—also bring in a good revenue stream. Online test bookings and payments are fetching more patients, while the app allows access to health records and triggers medication reminders. A good amount also comes from medical tourists. Fortis says revenue from medical value travellers nearly doubled to `425 crore in 2022-23, or 8.3% of total revenues, from Rs 215 crore in 2021-22 (5% of the total in 2021-22.)

Revenue from digital channels is growing and accounted for a fourth of total revenues in Q3FY24. Raghuvanshi says technology plays a vital role in modern hospitals, with three key areas: operating systems and records, equipment, and patient interface. Fortis will have an electronic medical record (EMR) system in one-and-a-half years. “We are heavily invested in robotic surgery and radiation oncology setups. On average, we’ll spend roughly `400-500 crore annually on equipment and IT-related initiatives,” says Raghuvanshi.

Fortis is also open to mergers and acquisitions. “Valuations in the M&A space are likely to become challenging, but opportunities will arise for standalone hospitals where second generations may not be interested in running operations. Consolidation will continue, as the organised sector currently represents only 8-9% of beds,” says the MD & CEO. And it is not restricting its strategy to India: for medical value travel it is targeting the markets in the Gulf Cooperation Council (GCC), Africa, Bangladesh, Nepal, and Southeast Asia.

Nitin Agarwal, DAM Capital’s Head of Research, says Fortis’s legacy promoter-related issues are now behind, and it has multiple growth levers. “All this puts Fortis in a strong position to deliver top quartile Ebitda growth with limited investments in greenfield assets,” he says.

Tausif Shaikh of BNP Paribas India says Fortis’s future looks promising. “We expect revenue growth momentum to remain strong for hospitals, with occupancy levels rising to 71% by FY26 from 67% in FY23 for existing beds, while diagnostics’ FY23-26 revenue should grow by double digits,” says Shaikh, who is BNP Paribas’s India Analyst-Pharma and Healthcare.

India’s rising cancer burden has made oncology the fastest-growing speciality in Fortis. “Oncology is another focus area experiencing rapid growth. While it officially contributes 13% to our revenue, some are recognised under other branches. It’s closer to our cardiac revenue, at nearly 23%. This rapid shift reflects changing disease patterns, and we’re adapting accordingly,” says Raghuvanshi.

Next up: the rebranding of Fortis as a unit of IHH. But that’s still some distance away as a legal battle is on for the rebranding. Raghuvanshi, as he rushes to another meeting, declines to comment on the matter or timeline as it is under review in a court of law. Business Today