Fortis targets 20% EBIDTA margins in next 2-3 years

Fortis Healthcare is now in a consolidation phase and is focusing on improvement of occupancy levels and margins of its existing hospitals, according to its management. The healthcare company will rely on brownfield expansion for driving growth and is also exploring the demerger or a possible listing of SRL Diagnostics arm, Chief Executive Officer Bhavdeep Singh told CNBC-TV18. He said Fortis aims to for a double-digit revenue growth and EBIDTA margin improvement in FY17. In the next 3-5 years, the company expects its EBIDTA margins to expand to 20 percent from 14.6 percent, Singh said. Fortis's board has decided to assess and evaluate a potential demerger of the diagnostics business in order to unlock and monetise its inherent value. The company believes that this process will take approximately 6-9 months, he said. Singh said the company sees a very healthy growth for radiology and the pathology business across the board. The SRL business is very healthy and robust business and Singh expects a significant growth going forward.In the March 2016 quarter, Fortis' sales grew marginally to 1,088 crore from Rs 1,063 crore (YoY). It's EBIDTA fell Rs 36.01 crore from 41.36 crore while losses grew Rs 90.8 crore from Rs 17.5 crore (YoY).Below is the verbatim transcript of Bhavdeep Singh's interview with Reema Tendulkar & Anuj Singhal on CNBC-TV18.Reema: What are your plans to unlock value in SRL Diagnostics business? You gave us a timeline of six-nine months in the conference call but what are the rough valuations that you are seeking?A: It is little tough to talk specifically about what the valuation will be. However, we see huge opportunity, SRL is the most established diagnostic brand in the country, it's a largest brand and we have a tremendous presence in the country and tremendous reputation with patients and with hospitals as well. However, over the next two-three months we will assess what are the specific opportunities, what direction we want to take. We have specific said that we do want demerge the SRL brand from where it is today and there are couple of different routes we can take. I think eventually it will be some form of listing but very specifically where we end up, what kind of valuation we see. We believe we have a solid asset that should commend significant commission over what is happening in the market space and it remains to be seen. However, nothing specific that I can comment on right now but we certainly think it will be a strong number and favourable for everything with respect to Fortis and the brand itself.Anuj: Once SRL is demerged, will you look at listing it in India considering that players like Dr Lal PathLabs have had blockbuster listing or are you considering an overseas destination?A: The options are open but our focus is going to be in India; the Indian markets and what is happening. The brand is strong so good healthy valuations should be available and ultimately it is about unlocking value for the shareholders. So our primary focus will be in India. Could we explore something down the line - maybe, but I see it more being in India than anything else.Reema: Can the combination of demerger and listing of SRL in India happen by the end of FY17?A: Over the next two-three months we will assess what the opportunities are and where we end up landing very specifically in terms of the direction we go. I think after that is probably seven-eight months, so we start thinking from a fiscal year perspective. I think that it is possible. It may end up creeping into early part of the following year but a lot will depend on exactly the course we use to take and the other external factors that are involved. Therefore, towards the end of the year or maybe early part of next year but very specifically it is hard to comment right now. Certainly once we decide the direction, we will try to move as quickly as we can.Anuj: The diagnostic business has slowed down in revenues in the recent past. Do you think that is going to continue?A: We see very healthy growth for radiology and the pathology business across the board. So the SRL business is very healthy, robust business. We see significant growth going forward. I do not see anything letting up there. I think in any market that continues to evolve and mature, you have some level of rationalisation that takes place but going forward we see a tremendous growth story, we see healthy margins, we see healthy growth and we are quite excited about what is happening in this space. Our brand continues to gain prevalence with doctors, with hospitals across the board. I think it is a fantastic story that I just think continues to get better and better from a topline growth perspective and from a bottomline margin perspective as well.Reema: When you say healthy margins - can you tell us what that would mean, can you guide us for some sort of margins at least in your hospital as well as in your diagnostic business?A: If you look at the hospital business we are sitting today somewhere around 15 percent and certainly we will be marching towards 20 percent. I think 20 percent is very much on the cards as we go forward. We have hospitals that do operate at that level now and I see no reason that more and more of our portfolio doesn't inch up that way, so based on the things that I just mentioned, a healthy growth year-on-year and if I look over the next two-three years and certainly 20 percent and beyond is what we see. Anuj: You have been consolidating your international business and making Fortis an India dedicated player. How much of more is left?A: We have consolidated our international business quite significantly. Many are aware that between 2012 and 2013 we did expand internationally. Our focus now is to run India based business. We have one investment left in the overseas market in Dubai, we have one pathology lab. However, as we go forward the international piece is going to drop-off substantially. We plan to exit the one asset that we have in international right now. So I do not see that being a factor. We are an India focused entity with respect investments and anything that we have will be happening in India. Our presence overseas is going to be in a shape of an operation and maintenance (O&M) but we do not have any investment; its investment light model. So any impact the international business had, is a thing of the past. As we go forward, it will only be a positive contribution when we think certainly not any significant losses in the future. Reema: How soon can you divest the Dubai asset that you were referring to?A: It is in a near future. I don't want to put a specific time but we have gone on record saying that that's the plan we want to exit it. I do not think it will be with us too long.