Mar 01, 2018 03:30 PM IST | Source:

Statutory auditor Deloitte raises several red flags in Fortis Q2 and Q3 earnings review

The statutory auditor said it wasn't able to come to a conclusion on the financial statement as it "couldn't get sufficient appropriate evidence"

Viswanath Pilla @viswanath_pilla
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Deloitte, the statutory auditor of Fortis Healthcare, has raised several red flags about ongoing investigations, inter-corporate loans and recoverability of certain vendor advances, in the auditor review report, accompanying the earnings statements.

The statutory auditor said it wasn't able to come to a conclusion on the financial statement as it "couldn't get sufficient appropriate evidence".

Deloitte said it hasn't performed an audit but reviewed the accounts of the company.

"A review is limited primarily to inquiries of group's personnel and analytical procedures applied to financial data and thus provides less assurance than an audit," Deloitte said in the auditor review report, accompanying the earnings statements.

Pending Investigations

Deloitte said it was unable to conclude the impact of pending investigations by an external legal firm appointed by Fortis, stock market regulator Securities and Exchange Board of India (SEBI) and Registrar of Companies (RoC).

Fortis, in its filing with the stock exchanges, stated that the company’s Audit and Risk Management Committee has appointed an external legal firm to investigate.

Inter-corporate deposits given by a wholly-owned subsidiary of the parent intra-group and related party transactions. The investigation is still on.

The company also said it has received communication from market regulator Securities and Exchange Board of India and the Registrar of Companies asking for information regarding certain inter-corporate deposits. SEBI has launched an investigation into the same, the company disclosed.

In its response to the auditor’s comment, the management said the effect of the outcome of the investigations on the financial results will be dealt with when the investigations are over.

Inter-Corporate Loans

On the Rs 473 crore funds transferred to third parties, which were later classified as promoter entities - Deloitte said it was unable to conclude whether the grant of inter-corporate deposits was in compliance with the company’s internal policy, on the recoverability of these deposits and the possible effect on the financials of the company.

The Fortis management however asserted in its statement that the deposits are secured and considers the outstanding amount as recoverable in due course.

So far Fortis Hospitals has received Rs 70 crore from one of the companies, it said.

Unsecured Advances To Vendors

The auditor’s review report also drew attention to unsecured advances of Rs 57.76 crore from certain vendors where recoveries have been delayed.

“In the absence of any security and delays in recoveries, we are unable to conclude on the recoverability of the said advances,” said Deloitte.

Fortis has delayed the release of the July-September earnings and clubbed them with the financials for October-December quarter. After a late board meeting on Wednesday, that started at 10 p.m. and concluded at 11 p.m., Fortis filed financials for both quarters with the stock exchanges.

Financial Results

The healthcare provider reported a loss of Rs 19 crore and Rs 23.6 crore for the two sequential quarters ended September and December of FY18. The revenues stood at Rs 1163.3 crore and Rs 1234.3 crore in the same period, respectively.

Revenues for the nine-months ended December stood at Rs 3474 crore versus Rs 3450 crore in 9MFY17. Consolidated EBITDA at Rs 516 crore versus Rs 586 crore in previous period, The EBITDA margin stood at 14.8 percent.

The Hospital business that accounts 81 percent of Fortis revenues grew 0.57 percent to Rs 2815 crore in nine months ended December on YoY basis, while the diagnostics revenues rose 8.3 percent in the same period.

"The Company witnessed a challenging environment over the past few months, primarily due to external headwinds in the healthcare environment, coupled with specific issues related to the group," Fortis said in a statement.

"Despite the aforesaid, the business both operationally and strategically stayed on course driven by a continuing focus on improving patient care and a renowned medical talent pool delivering world class healthcare services to patients. The broader healthcare environment has now begun to witness signs of improvement and stabilization and this is expected to augur well for the Company going forward," the statement added.

Fortis said following the resignation of promoter-directors Malvinder Singh and Shivinder Singh referred as Singh brothers - the Board has instituted a Management Committee to oversee the functioning of the Company both from a strategic and operational perspective.

The promoters Singh brothers shareholding has now declined to approx. 0.77 percent versus approximately  34.4 percent.

Fortis said it continues to explore options related to fund raise and has a resolution in place to raise upto Rs 5000 Cr through equity, debt and/or quasi-equity instruments.

In order to realign the current structure with the RHT Health Trust and further strengthen its operational performance, the Company has on February 12, 2018 signed documents for the acquisition of the entire RHT asset portfolio for an enterprise value of Rs 4,650 Cr. Fortis as a sponsor to the RHT Health Trust currently holds approx. 29.7% in the RHT Health Trust.

​The company said its net debt stood at Rs 1,655 crore at end of December, 2018, a jump of 23.6 percent on sequential basis. The debt equity ratio stood at 0.27 percent.
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