Fortis Healthcare Limited (FORTIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call hosted by Fortis Healthcare and IHH Healthcare Berhad. [Operator Instructions] I now hand the conference over to Dr. Ashutosh Raghuvanshi, MD and CEO, Fortis Healthcare Limited. Thank you, and over to you, sir. .

Thank you. Good morning and good afternoon, everyone. Thank you for taking time to join us on this call today. I have along with me our group CFO, Mr. Vivek Goyal of Fortis Healthcare as well as Mr. Anurag Kalra and Amit Mahendru from the investor management team. We also have the IHH Group CFO, Mr. Dilip Kadambi, on the call. And the purpose of speaking with you today jointly is primarily to address any clarifications you might have on the recent developments related to the Delhi High Court order that was released on this Monday. I hope all of you would have had a chance to read our stock exchange announcement on this matter. The current order, which is the 200-page order by the court has directed the appointment of forensic auditor and provided a scope to the audit to be undertaken. While we can address any questions you might have. I want to highlight upfront that the current order in no way changes, limits or impede any of our strategic or operational plans, including those related to our investment, CapEx, bed expansion and our initiatives on the M&A front. We are currently in deliberation with our legal counsel of the best way forward. But at this point of time, we will fully abide by the directions of honorable court and cooperating with the set forensic exercise. Those were my brief opening statements to set the context. We can now move to the question-and-answer session.

Can I please request the moderator to begin the Q&A, please.

[Operator Instructions] The first question is from the of Neha Manpuria from Bank of America. .

First question, Dr. Raghuvanshi, on the scope of the forensic audit, would this just be the RHT transaction that photo did? Or would this also include IHH's investment into Fortis? If you could give us some color on that? And based on our legal counsel, what could be the duration of this forensic audit based on [ past specific ].

Yes, Neha. The scope of audit covers a few things as mentioned in the order. One is the reconstruction of complex evolution of SHHPL, which is seen promoter entities, which the steel promoter entity, with nothing to do with FHL. Through this entity, they were holding shares in SHL. So during the period of '26 to '18, they would look at this. This is the main contention of the matter. Wherein despite assurances being given to the court by the erstwhile promoters, that they have adequate assets to cover the arbitral award given to Daiichi. The key assets were their shares in Fortis. So these shares were not eventually divested to third -- invested to do other third parties and not to IHH Healthcare. The second part of the Forescout is the examination of acquisition of controlling stake in FHL by IHH NPK, including approvals filing, et cetera, related to the such acquisition. -- and the subsequent utilization of investment amounts towards the acquisition of health care assets from RHT Health Trust in Singapore. But as you are aware that as far as this shares were concerned. This was not bought any shares, but this was a primary issuance, which had happened. And -- so this -- we have a surprise that such a thing has been included in the scope. The third thing which is there in the scope is the examination of any role, if any, of FHL and its offers and key managerial personnel and processing and approving the unencumbered share dissipation transaction of the swine promoters. We again believe that this is not something which was in which company was involved in any way or had any role to play because this serves between the sell promoters and the concern back. And the last part of this scope is the examination of the role of all 17 banks and financial institutions anticipation of [indiscernible]. So that is the largest scope, which has been ordered. And as far as duration is concerned, it has been written that 4 weeks, the auditor needs to say its questionnaire of the information requisition. -- load by 2 weeks to respond and then 6 months to come up with a report. That's on this guideline, which has been said by the call.

Okay. And thereafter, this would again be heard by the high court -- or I mean what would be -- what could be a potential outcome of these audits? I mean I know there are a lot of variables, but just trying to understand like the worst case that could come out in your view? .

Yes. So the audit findings obviously will be presented to the Board. But as I have already made it though it would be premature to comment on this stage. But we believe Photos has been in complete compliance the law that at all the times. And hence, at this juncture, we don't foresee any significant or material adverse results from the audit.

Understood. And my second question is.....

Yes. And if I may add, Neha. Dilip here. From IHH's standpoint, from an IHH's standpoint, you must recall that we participated in a process that were run by the independent directors appointed by then investors will have to investors. And these indicating directors ran a process, a fair and transparent process where there were other bidders as well. And as part of that, as Dr. Raghuvanshi mentioned, we invested money sent the company. So we posted it in the primary offering, bring us monies into the company, and we did not buy any secondary strength at all. So Dr. Raghuvanshi mentioned, one of the important scope is in terms of dissipation of shares that was earlier meant for security or toward the import. Since we do not buy those shares, I think we are kind of -- we are comfortable in terms of our position at the time.

Fair enough. And Dilip, just a follow-up question. From an IT perspective, given that at some point, we were looking at Glenigan Fortis getting integrated. And you also mentioned in case Fortis requires the growth capital, you could look at an infusion into Fortis. Is it fair to assume that this order in any way does not restrict us from doing any such corporate actions in terms of IHH putting in money into Fortis?

Just to rewind back, I would say one of the biggest impediments we had previously was the MTO, which was not done, which we completed last year with the resin -- and we are, at this point in time, even after the order, nothing changes for us. We are fully backing focus. Focus will be a growth engine to grow our India platform. We will continue to look at merging lendings and quotes at the appropriate time. And we are happy to put capital into Fortis the need arise. So none of that changes.

Next question is from the line of Damayanti Kerai from HSBC.

I just wanted to understand one point. If I recall, you earlier mentioned you have engaged a third-party consultant to look into this transaction. on your own, and you have shared the outcome as well to court. So was that the case? And where did the court actually defer in terms of the funding which you might have shared?

Yes. So this was well submitted during the Supreme Court hearing and the Supreme Court had very clearly stated in its order that as far as this transaction is concerned, that they have not really found any kind of thing to probe in that However, the judge at the high cost level felt that it may be appropriate for a wider inquiry. So -- but the Supreme Court has clearly stated that there is no kind of -- that transaction is clearly in the normal course of business.

Yes. I think that was the question that you wanted want auditor and come up with your finding share with the court again. So where I think where we can assume things might settle down? Because in the earlier I think assessment understanding was you are done with the finding from your side. So this makes couple and soon, but that did I think, work out. So from recent development, how confident you are that once you are done with the process, we can settle the matter at one.

Yes. So we had done the internal exercise. And on basis of that, we have the confidence that at that point of time, there was nothing from the Fortis side, which had to be done or which has been done. -- which could be considered as some kind of an abnormal thing. So that brings us the confidence. However, -- as far as the forensic audit thing was concerned, the Supreme Court had as the matter to high court to decide whether a forensic audit is required or not. And the high court in all its wisdom has decided that this for instance, audit is required. So we still have maintained our position because we have done this investigation, and we have looked at all the previous et cetera. As you might recall that all these events are in the previous management before I came in. So we are pretty sure that whatever paper records, everything is information is available with us. We have checked that thoroughly, and we are fairly confident that the outcome of this exercise should be in our favor.

Sure. And a question to IHH team as well. In your assessment, what could be the worst scenario which your team is building in if this market doesn't go the way which you are intending?

So look, as Dr. Raghuvanshi said, it's going to be difficult to comment on the assessment of the court. But what I can tell you is, again, just to reiterate the fact that it was a fair in terms of the process that was held. And as per our record, well, we are compliant with all the regulations that we acquired, for example, even MTO even though it took almost more than 7 years will be patient completed the -- so from a regulatory standpoint, we have complied with all regulatory matters that were required. It was a process, again, that was on currently by the 3 parent directors, the independent directors of the company. And we participated alongside you may recall, other parties self. So we were not the only bidding party. We had other parties because of competitive process. And as part of the competitive process, the bid was awarded to IHH. And as part of the midterm, the indigident directors at that point in time realized the need for increasing of capital into focus, and hence, in the wisdom decided to issue shares to the bidding party, the successful bidder. And hence, we accumulated our current holding in focus to issue the primary shares by the company to -- and we haven't -- from then on, we haven't accumulated any secondary shares. So I can confirm that we all find the shares, and I have complied with all regulatory requirements.

Next question is from the line of [ Chong Song ] from CIMB.

I have 3 questions here. What was the reason of the drop in equity stakes from the Sing barter prior to the sale shareholdings to IHH back in late 2018? Do the thing rather actually dispose of their shares in the open market before I purchased a from the open market? My second question is, can I actually confirm that all the shares that they bought are actually being acquired from the open market? And lastly, does is necessarily require approval from the India Supreme Court in order to proceed with the MTO?

Yes. So first question first. As far as the dissipation of the assets of Sing Brothers is concerned, they had pledged their shares to the banks -- and the banks had sort of attached these shares and liquidated them in the free market. As a result of that, the zinc brothers holding in the company had come down to negligible by the month of February of 2018. -- whereas the new Board of the 3 independent directors at that time to take over the management of the company and they ran an independent process. At that point of time, the company required capital primarily to buy the assets, which were sitting in an RHT Trust, which was a Singapore-based listed fast. Red trust. And those assets needed to be bought back because company was in severe financial stress because of the outgoing of the rentals. As a result of that, the process was run, which was an independent competitive process, as Mr. Dilip has already pointed out. And post that process, we had the in independent shows IHH as the potential partner and they infused IHH infuse fresh capital through preferential allotment. To your second question, there were no shares purchased from open market or the well promoted by IHH investment, and it has no connection whatsoever with the shareholding of previous promoters. So we can confirm that to you as well. And as far as the third question is concerned, as MTO is already over. for the MTO, since there was a proceeding going on in the High Court, the regulator, which is SEBI, did not encourage to complete that process. But post the high Supreme Court ruling, we did IHH, they approached the regulator say, and then they were permitted to conduct the MTO process, which was completed last year.

Next question is from line of Shyam Srinivasan from Goldman Sachs. [Operator Instructions] Shyam, please go ahead. Shyam Srinivasan from Goldman Sachs.

So I just had 1 question following the -- this audit announcement by the high court, right? From an operational standpoint, have you seen anything from any of your employees or doctors or any of that, do we need to recut back and reassure them that things are fine? Or is it something that doesn't require any sort of age of the concerns or laying concerns leading that is an exercise we need to do. And also from a brand perspective, do you foresee anything that we need to kind of be trying to expand to patients, consumers, prescribers, just some question.

Yes. No, it's a good question. And the perception is a deep in spine and we're always aware of that. But I think as far as the hospital operations are concerned, as I said in my opening statement, that's a completely independent thing. And patients and our -- those who use our services -- they are not always be concerned as to what the shareholding is or how the legal issues are panning out. We are more concerned about what service we deliver. -- our teams are completely committed to continue to provide as good a patient experience as possible and we have good clinical services. So we completely focused on that. Our operational team is -- and the medical team are completely focused on that part. Yes, a little bit of communication is always necessary Whenever there is a public news about an organization, I think the employees not only have right, but they must be taken into confidence and explained what the situation is. are a very transparent organization. We have always stayed with the very high corporate governance standards since the time I have just taken over, and we have transferred into our investors, our employees and our patients. we will continue to do that. But you must appreciate that the operations are completely insulated from going on in the legal and shareholding level. And as you said -- as you heard from Mr. Dilip that IHH is fully, fully committed and he is very bullish about India and the prospects of Fortis and the platform. So we will continue to do that. Now as far as operations is concerned, all our plans, which we have earlier mentioned about our brownfield expansion, the M&A activity, et cetera. will continue to go as it is because we have already stated that it is internal accruals, mainly which is going to drive that part of the growth. major M&A, et cetera, you have already heard from IHH, they are that they have no impediment in investing into the company. So I think situation that way is the company has shown its resilience in past, and it is, again, ready to show it.

Helpful. Just the second question, I don't know whether you'll discuss it, but let me ask it may, what are the legal options that we have in front of us? Like is it just accept the verdict and then the audit happens. And then once the audit gets concluded, we get some output. And is that the Sorry, I'm just trying to think what are the options that the company has? .

Yes. So I can't comment exactly what we're going to do. But currently, our legal teams are applying their minds and studying the legal options. We are in discussions and internal discussions and also discussions with our legal teams, both external consultants as well as internal team. And based on that advice, we would do whatever actions are recommended by them over the next couple of weeks. But of course, it's -- if we have to continue with the audit, then we will fully cooperate with that and do whatever is necessary.

Next question is from line of [indiscernible] from Nomura Securities.

Three questions from my side. Firstly, over the last few years, Fortis has been under the ceiling end of Didier's legal challenges in India. We've seen IHH open a legal front in Japan against the company because of these court cases in India. But does Fortis also plan to launch any similar legal proceedings against Daiichi Santa in India to stop them from continuing this cases? My second question is, has either Fortis or IHH had any discussion with Daitch Sankyo on a management level, to sort of resolve this issue? Or do you do what companies plan to deal with this only in the courts going forward? And lastly, a question for Dilip. I just had recently said that you plan to increase your stating for this to about 51% over the next 3 to 5 years. I understand that this case doesn't really change your long-term plans, but just wanted to understand if there's any impact on the time line for this.

Maybe you can start with the last question, and then I can hand it over to Dr. Raghuvanshi for the others.

Our commitment to take our stake up to 50-plus percent continues. And as I said, in terms of investment into focus, we are fully committed -- so any capital expenditure need that Focus might have. We are happy to infuse money, of course, within the purview of the law in terms of what we can do on a year-on-year basis. We're happy to do that. So -- we are fully committed to taking our -- first of all, our shareholding up to 50%, as outlined by Dr. Prem previously. And we are also happy to infuse money as and when required into the company for their growth needs. So nothing changes for us here.

Yes. And to the other 2 questions, the first question you asked about whether we intend to do any proceedings richly about Daiichi. We would consider. But currently, since the matter is subjudice -- we don't think it is appropriate to get into any kind of a counter litigation we would wait for the normal court processes. We have full faith in the legal system of the country. And as far as the discussions is concerned, we have not had any discussions whatsoever at the moment. But I am not sure that when the are wrongly accusing us of wrong doing when we are neither a judgment bettors nor were we garnish at any stage -- so it is unfair on us. So definitely, we will consider whatever actions we can take to protect the interest of our company.

Next question is from the line of Nikhil Mathur from HDFC Mutual Fund.

My first question is that are there any financial -- there's also that you need to sideline to take this case to Fusion now. I mean, any cash requirements in this year or next year that you would want to provision or keep aside to -- I mean, this legal case forward? .

If I can answer this, Vivek this side, Nikhil. So there is no need for any provisioning. As you can see from the coproduct, no liability has been fixed. It is just like a fighting finding exercise, which I could want to do through parasite. So right now, there is no need for any provisioning or anything, no liability has been fixed. As regard any impact on the financials, I think balancing impact is 0. However, because of this legal battle and things like that, there will be some legal expenditure, which anyway we are incurring in last so many years. So that will be there. The company is subject to incurring that legal expenses going forward also.

Okay. Do you mind calling that out? What was it last year? And would that continue the same kind of number?

Yes, it will be -- it will depend upon the intensity of the case, of course. So last year, for example, it was around INR 25 crores roughly. So because last year, it was quite intense, the court hearing. And this year, it is difficult to predict, but similar amount one can budget.