In the last week of March, the company management revealed in an analysts’ call the extent of the impact of the Covid-19 virus outbreak on its operations. The numbers are not encouraging.
It said there has been a 35-40% decline in in-patient admissions and a 60-80% drop in out-patient visits. This is expected to result in a shortfall of Rs 2 billion, to be managed through a mix of internal accruals and short-term debt.
In short, the current conditions arising out of the ongoing 21-day nationwide lockdown and the debilitating effect of the pandemic are likely to have a negative impact on its overall performance.
Across the board, a drop in patient admissions means healthcare companies are struggling with higher costs in the face of falling revenues. Their fourth quarter performance, with Fortis being no exception, is likely to be reflective of the adverse conditions.
Fortis also faces another completely different challenge, one regarding its takeover.
The takeover by Malaysia-based private healthcare group IHH Healthcare has been stuck since December 2018 and the terms of the acquisition are being investigated by the Serious Fraud Investigation Office.
Besides, its stock price is languishing near 52-week lows and only seven analysts – the least among healthcare stocks – are tracking the stock, albeit with a ‘buy’ recommendation and a target price that is 38% higher than current levels, as per Bloomberg data. This is not so surprising in an industry known for its very few sell ratings and higher number of analysts tracking the sector.
Although its institutional holding stands at a high 50%, with ace investor Rakesh Jhunjhunwala holding 2.65%, stocks of better-run healthcare companies such as Apollo Hospital and Narayana Health (formerly Narayana Hrudayalaya) are available at lower valuations due to the current rout in financial markets.
Be that as it may, Fortis has shown improved operational profitability after a change at the helm.
In March last year, Narayana Health veteran Ashutosh Raghuvanshi was appointed CEO and tasked with streamlining operations, controlling costs and improving efficiency. That has shown results over the past few quarters.
And, last week, ratings agency ICRA upgraded its long-term rating, based on continued improvement in operating metrics.
Although this could tempt some investors to buy into the stock, our view is that, at a time when most healthcare stocks are battered and available at attractive valuations amid a volatile and disruptive environment, they may not want to get stuck with a stock that has company-specific uncertainties going forward despite its early signs of operational improvement.