Published on 30/03/2020 3:19:01 PM | Source: Motilal Oswal Securities Ltd

Update on Fortis Healthcare Ltd by Motilal Oswal

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Hospital, diagnostics visits decline as India heads into lockdown

Fortis Healthcare held an investor call on 27th Mar’20 to discuss the impact of the outbreak of COVID-19 on the company’s operations. Key takeaways:

* Following lockdowns amidst the COVID-19 outbreak, there has been a decline in IPD admissions by 35-40% and in OPD visits by 60-80%. Emergency services remain operational, while all elective procedures have been postponed. Around 30% of IPDs come from emergencies.

* Management expects INR2b cash shortfall due to the ongoing lockdown, which will be managed through a mix of internal resources and external short-term debt.

* SRL Diagnostics has seen a volume impact of 70-80% over the past 6-7 days across both B2B and B2C customers.

* It has received an approval to conduct coronavirus tests at two of its labs (capacity: 1,000 tests/day).


Sharp fall in occupancy/OPD visits

* Following lockdowns amidst COVID-19 outbreak, there has been a decline in IPD admissions by 35-40% and in OPD visits by 60-80%. In OPD, dialysis, chemo and radiation, patients will continue to be served in demarcated areas irrespective of the lockdown. Emergency services remain fully operational and elective procedures have been postponed. On an average, ~30% of total admissions come from emergency cases. The company sees ~40% volumes decline at this point.

* Occupancy is at 43-45%, down from 50% in the first few days of disruption and 70% in February this year. Management’s early estimates indicate that cash burn situation starts below 60% occupancy.

* Around 10% of hospital revenue comes from international patients. Due to the lockdown and the ban on international travel, there is 80-90% reduction in international footfall. Management expects revenues from international patients to reduce to zero in the short term as the situation continues.

* Fortis has not seen a surge of respiratory cases at its facilities at the moment. This is a time when respiratory cases are usually seen at hospitals, including H1N1. Notwithstanding that, there is no surge in COVID-19 cases or patients with similar symptoms (such as pneumonia).

* Currently, there are 13 COVID-19 patients across all Fortis facilities who are treated in total isolation. Five COVID-19 patients have been discharged so far and one patient has died because of complications from this virus.

* Patients coming to private hospitals will have to pay out-of-pocket. Government could issue some directives wherein a certain part of the costs incurred by patients would be reimbursed by the government.

* The company has earmarked 262 beds for COVID-19 patients, half of which have ventilators.

* Hospitals have other patients in admission and all hospitals thus cannot cater to COVID patients. However, if there is a surge in cases, some of the private hospitals could also be turned into COVID hospitals.


Diagnostics business volumes decline by 70-80% due to ongoing disruptions

* Volumes have declined sharply since 20th March with the recent lockdown further exacerbating the situation. In the last 6-7 days, overall volumes are down by 70-80%.

* Impact is seen across both B2B and B2C customers as hospitals and physician practices are closed for most OPD patients.

* Further, there is constraint on the logistics part as well. The situation is expected to improve over the near term.

* The company is engaged with various bodies and authorities to seek help in resolving the logistics challenges arising from the lockdown. Effort is on to see how soon things can be smoothened.

* Two of the reference labs, one in Mumbai and one in Gurgaon, have been approved to test for coronavirus and begun testing. There are some constraints around availability of kits and protective wear.

* Because of the added protective measures, cost of collection is turning out to be higher than cost of doing the test.

* SRL has 1,000 test/day initial capacity based on machine and time required to run the COVID-19 tests. These machines are not running coronavirus tests exclusively and also being utilized for other tests (e. g. H1N1). In case the machines are used exclusively for coronavirus tests, capacity can be increased to 2-3x.

* Management is discussing the possibility to get testing approvals for two more labs. Industry’s current level of capacity is estimated at 25k/day, excluding government labs. The company does not see the necessity for the industry to expand the PCR platform capacity at this stage.

* At INR4,500 per test, the company recovers its costs but does not make much profit.

* Pricing of the tests is decided by the government and is not necessarily based on USFDA based kits and their prices.

* There is considerable shortage of kits for COVID-19 test. This issue is expected to get resolved soon.


Other highlights

* Cash shortfall of INR2b is expected due to the ongoing disruption. 50% of the requirement can be managed internally and 50% will be funded from additional debt.

* The company already has cost-optimization measures in place with control on marketing effort and capex.


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