Won’t read too much into forensic audit; Fortis Healthcare a buy on dips: Param Desai

"I would not read too much on a forensic audit per se but from a business perspective yes, had the open offer for Fortis gone through, IHH could have taken a majority of the stake and some of the decision making in terms of whether to have greenfield expansion to take place could have been more of a smoothened road," says Param Desai, Senior Research Analyst, Prabhudas Lilladher

I guess we are seeing the Fortis Healthcare stock price react the way it is because the overhang continues. The Supreme Court has only pushed the ball in the Delhi High Court to decide on the open offer?
Yes, right. The Street was anticipating the open offer to go through because this is going on since the last three years and currently IHH owns 31% stake and generally they like to have the majority stake wherever they have acquired the assets. So the overhang continues from that perspective.

What does it mean for investors? How big an overhang has this been in your conversations with investors? Going forward, what do you expect for Fortis with respect to this forensic audit being done? Could there be more overhang and roadblocks?
After IHH came on board, a lot of accounts needed to be cleaned. That had been done and whatever the past legacy issues were, that was more or less sorted out. I would not read too much on a forensic audit per se but from a business perspective yes, because if the open offer had gone through, the IHH could have taken a majority of the stake and some of the decision making in terms of whether to have greenfield expansion to take place could have been more of a smoothened road.

Also, there were some kinds of savings or some kind of cost with respect to the legal cost and some of the other compliance related costs which was expected to improve the margins. That will continue to remain and that overhang still persists from what the Street was anticipating.

What is your long term outlook on Fortis after this recent fall given that the overhang continues? Do you think investors should look at buying into this dip right now?
From a business perspective, they have two divisions – hospitals and diagnostics. Hospital is doing pretty well since IHH, the new management came in because a lot of positive changes have been implemented.

Specifically on the operational side, the margins had improved in the last two-three years from 10% to around 16% and also from a medium term perspective, they are adding some 1,500 beds on a Brownfield expansion that does not get changed because of this decision.

So almost 40% capacity enhancement will take place on the existing basket which gives a good visibility from a growth perspective even on the diagnostic side, They are top three guys in the market share, they have been pretty aggressive on adding new collection centres, they had done a lot of structural changes into that business also from B to B, B to C. So, from a business and growth perspective, both the businesses look pretty solid from the medium-term perspective. There are reasonably good growth drivers and to that extent, I will recommend it to investors to use this dip as more of a buying opportunity from our end.

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