Fortis Healthcare (FORH) reported Q 2FY18/3QFY18 revenue of Rs 12 billion (flat y-o-y)/Rs 11.2 billio (-1.1% y-o-y), with EBIDTA margin of 8.9%/ 4.6%. Hospital business revenue came in at Rs 9.7 billion (-0.6% y-o-y)/Rs 9 billio (-0.9% y-o-y) for Q2FY18/Q3FY18, with EBITDA margin of 8.5%/5.5%. SRL reported revenue of Rs 2.2 billion (+5.2% y-o-y)/Rs 2.1 billion (+10% y-o-y), with EBITDA margin of 23.2%/18.4%. Q2 numbers were in line, but Q3 numbers missed expectations. FORH reported a loss of Rs 236 million/`191million in Q2/Q3FY18. Promoter holding is now down to 0.8% from ~34% in December17 due to invocation of pledged shares. Yes Bank now is the largest shareholder, with more than 17% stake in the company. Post invocation of pledge shares, banks and financial institutions (Yes bank, Axis bank, Indiabulls) have the right to sell their shares to a third party, which can eventually become the promoter of the company.
Auditors have raised red flags on related-party loans and inter-corporate deposits. Consequently, they were unable to express conclusion regarding the financial statements. Fortis Healthcare needs to recover loan of ~Rs 4.7 billion from promoter entity. Management responded that it is confident about recovering this loan, but we see this as a concern, given the financial health of the promoter entity. Sebi investigation is on. Fortis Healthcare’s stock has remained volatile in the recent past on the back of news flow related to issues with the current promoter and possibility of equity infusion in the company. Given that current promoter holding is marginal, banks may look to find a new investor, which could lead to stock re-rating. We have valued the hospital and diagnostic business based on 20x and 18x H1FY20E EV/EBITDA, respectively. We cut EBITDA by 26%/9% for FY19/20E as we build in slower margin ramp-up.