Fortis Healthcare's Q3FY18/Q2FY18 results (Under Review) - Awaiting clarity

Q3FY18/Q2FY18 result highlights

• Fortis Healthcare has reported quarterly financials for Q2/Q3FY18 together. India hospital revs for Q2/Q3 at Rs11.9bn/Rs11.2bn (+2%yoy/-6%yoy) vs our est of Rs11.9bn/11.6bn. Diagnostic revenues for Q2/Q3 came in at Rs2.2bn/Rs2.06bn vs est of Rs2.2bn/Rs1.97bn.
• Operating profit came in higher for Q2 at Rs1.32bn (vs est of 1.08bn) while it stood lower for Q3 at Rs0.85bn (vs est of 1.02bn). Domestic hospital EBITDA net of service fee came in higher at Rs821m for Q2 (Rs593m in Q1FY18) vs est of Rs 681m while for Q3 it stood lower at Rs508mn vs est of Rs650mn. Diagnostics EBITDA for Q2/Q3 came higher at Rs520m/375 vs (Rs390mn in Q1) and est of Rs425mn/385mn.
• The promoter shareholding has fallen to negligible levels of 0.77% led by the invocation of the pledged shares by the lenders. The promoters have also resigned from the board and the company is currently being governed by a committee of independent directors.
• Auditor has flagged issues related to recovery of Rs4.73bn secured short term investment by a subsidiary and ~Rs540m dues from vendors. An internal investigation is also looking into the Rs3.9bn investment in a fund of funds. Mgt remains positive on recovering these amounts.
• The company continues to pursue fund raising options to fund its proposed RHT buyout. Any such fund raising option may also lead to change in promoter / management control. While the company remains hopeful of completing the transaction shortly, the contours and timing of any such transaction remains uncertain at this point in time.

Key negatives: Lower revenues; auditor red flags; SEBI enquiry

Impact on financials: We have reduced our FY18/19 EBITDA estimates by 20% / 18% and introduced FY20 estimates. Impact of RHT transaction is not taken into account

Valuations & view

While FHL continues to be a fundamentally strong healthcare asset, its operational outlook is currently overshadowed by uncertainty on multiple key issues like promoter / management control change, potential balance sheet irregularities etc. The outcome of these issues will have significant bearing on the way forward. We are placing our FHL rating under review till clarity emerges on these key aspects.