June Quarter of Fortis Healthcare Ltd may seem like a sideshow with investor attention focused around IHH Healthcare Berhad completing the acquisition of a 31% stake in the hospital chain, now preferential allotment to IHH have approved by the Fortis shareholders.

The transaction should shortly watch Rs. 4,000 crores cash flowing into Fortis account, giving it enough capital to run its daily operations and to finish the acquisition of its assets from a Singapore-based business trust. With the right to appoint two-thirds of the board, the completion of the preferential allotment will also see IHH take the driver’s seat. It will really happen when the acquisition should start showing its results.

Only time will tell whether it will be business as normal, or IHH will make significant changes in how the hospitals are run and its widening plans. Investors should keep the watch on any change in top management. However, seems unlikely that IHH will invest Rs.7,349 crore, including the open offer, for it to be business as usual.

After a thorough inspection of hospitals business, keeping in mind the questionable transactions that have come to light, IHH may also go on a clean-up drive. Though it does not seems like an unclear possibility. But this may result in provisions that could scar profits.

Also, the pending matters being investigated by regulators still remain. So, some short-term volatility in Fortis Healthcare’s financials may continue.

According to June Quarter results, IHH has a lot of work to do. Fortis Healthcare’s revenue declined by 9.9% from over a year ago and by 4.1% sequentially, attributable to a decline in the hospitals business. Its diagnostics business showed growth of 2.1%. The management had blamed liquidity concerns and challenges on other fronts for the hospitals business to underperform for the March quarter. These over changing in private hospitals have also affect occupancy. Even the management attention had been diverted to governance related controversies. It also describes how they affect the process of getting new investors on board.

In spite, In July and August improvements are seen in the level of occupancy. From 65% in the March quarter and 62% in the June quarter to 66.9% and 69% in July and August, respectively. The expectation of higher revenue growth is there. By the end of the fiscal year, the firm is targeting 70% occupancy levels.

Over a Year ago, the June quarter also saw total revenue decline by 10% and its Ebitda (earnings before interest, tax, depreciation, and amortization) fell by 84.2%. If you add back the amount Fortis pays as rent to the business trust that owns some of the hospitals, then Ebitda fell by 50.6%. It incurred pre-tax losses of RS.90 crores, higher than March quarter’s loss of RS.72 crores.

Once IHH lays out its growth plans, Fortis’s shareholders will get a clear direction of where the company is headed. Of course, the settlement of its pending regulatory matters will also count.

The results offer nothing to shareholders to improve the depression outlook on valuations. Fortis shares were trading at RS.146, a discount to the RS.170 per share valuation, at which IHH is buying the controlling stake.

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