Can Colgate Bring Shine To Investor Portfolio

Colgate-Palmolive is the leader in oral care market with products like toothpaste, tooth powder, toothbrush and mouth wash etc. Company was incorporated in the year 1937. In mid 80s the company introduced toothbrush in the market. The company also provides a range of personal care products under the `Palmolive' brand name. Recently, company is focusing on premium toothpaste products like herbal, sensitivity, charcoal and salt.

Size of India dental care market 
Toothpaste is highly penetrated product in India with market size of INR 9,000 - 10,000cr. Besides Toothpaste, toothbrush is also decent market size of INR 3,000 – 3,500 cr. Besides these two products there is small market for tooth powder, mouthwash and other dental care. Though the toothpaste is highly penetrated product, we still can see low single digit growth in market as the frequency of brushing is expected to go up in India. Pre Covid, Colgate ad campaign focused on raising awareness of benefits of brushing twice a day. In their FY21 results concall, company has mentioned that they will bring this back in focus again.
Within toothpaste, segments like herbal and sensitivity (which cater to customer with acute tooth problem) are growth at healthy double digit but that market size is small. These segments are expected to grow at higher rate for medium - long term as awareness goes up and customers find comfort in paying premium price for better product. Colgate has launched toothpaste for diabetic patients in India, addressing high sugar level creating gum problem.

Colgate loss of market share due to Patanjali
Let touch directly to the Colgate pain point. 
Colgate market share has dropped from 57% in 2015 have stabilized to 50% in 2020/21. This is due to emergence of Patanjali who has eaten market share from all incumbents.
 

Patanjali started to get stronger from FY15 onwards. From 3% market share in FY16, as per media reports Patanjali has achieved double digit market share by end of FY21. In last few years, Patanjali group has become very strong in terms of size and scale. Their subsidiary Ruchi Soya itself is 15000cr revenue and overall group revenue can be in the range of 25 – 30,000 which is only after HUL in the Indian FMCG space. If company of that scale want to gain market share and compete on prices, investor taking caution stand is understood. Patanjali is continuously growing its distribution reach / expanding footprint we need to keep an eye on market share and see how it evolve. Positive thing to note is Colgate market share has stabilized at 50% and there was small improvement in market share as well recently.

Colgate growth projection given competitive landscape
Now, Lets look at positive things which are happening at Colgate and why we are evaluating Colgate for investment. Colgate revenue has grown 7% for FY21, and similar trend is continued in first two quarter of FY22, this is higher than 4-5% company has grown in FY17-20
Besides that, EBITDA profile of the company has improved significantly in FY22. For last 5-6 quarters company has posted more than 30% as EBITDA margin. This is near 3-4% higher than 26-27% they use to do in earlier years.
Even when we look at analyst reports. Consensus estimates remain that Colgate revenue/profit is expected to grow at 8-9% for next few years. Colgate remain very high ROE business consistently delivering over 60% return ratios and since company doesn’t need high capital either on capex or working capital, profit into cash will remain high, which will be returned to shareholder as dividend.

What’s unique about Colgate margin

This is very high margin business in FMCG. Normally FMCG (even likes of HUL and Nestle) will be EBITDA margin of 24-25% while Colgate makes much higher margin of 30% plus. Interesting point is other FMCG HUL/Nestle will make EBITDA margin of 24-25% and they have ad spend of 8% of revenue in contrast to that Colgate makes ad spend of 14% and then make EBITDA margin of 30%. There is great cushion in protecting margin profile of the Colgate. All this is because of very low cost of raw material cost in making toothpaste/toothbrush, Gross margin is near 65%.
 

What is valuation construct on Colgate: PE + Div yld
Since this is growing dividend and cash flow rich company, it should be valued at PE ratio. For last 5 yrs it has traded at PE ratio of 46x of trailing 12months EPS. While going through management commentary and analyst forecast, it seems revenue and profits will grow at approx. 8% for next few years. De-constructing this 8% growth forecast in revenue, I believe, volume growth will be minimal, may be 1-2% this will be driven by more people adopting brushing twice a day, 3-4% will come from value mix changes, and 2-3% kind of inflation.
Currently, the valuation has de-rated, it is trading less than 40x of trailing EPS compared to Avg of 46x for last 5yrs. If we assume there will be no re-rating back to avg of 46x, then stock should deliver 8% return on growth of EPS + 2-2.5% dividend yield. So, a moderate 10% return in case there is no re-rating back to normalization. 
Colgate multiple has moved from 46x to 40x as it has lost market share, as we discussed earlier due to competition from Patanjali. Now for last 1-1.5yrs, market share has stabilized at 50%, if company is able to maintain the market share from here, I believe there can be small re-rating from current multiple.

Indian biz valuation vs MNC parent

General view in market is MNC companies are valued at way too high premium in India. So, I was having a look at few MNC companies in India, how they are valued in India compared to their parents overseas. I took HUL and Nestle to compare with Colgate. For eg, Colgate profit will grow at 8% for next 3yrs which will be 90% higher than Parent profit growth, while premium in terms of PE ratio and cash flow for 2yr/3yr fwd is in the range of 60-70%. While comparing same for Nestle and unilever profit growth is expected to be 110-120% while the premium which is paid for valuation will be higher than 200%. It seems market is giving lower premium to Colgate as compared to its growth rate.

Where Colgate can sit in someone portfolio?
Normal tendency of everyone will be if the normalized return without any re-rating will be 10% then should one consider such investment in equity portfolio as normally one would like to have 15-16% return on long term for equity investment. Colgate is special situation in FMCG universe. There is hardly any disruption in toothpaste segment apart from Patanjali in last many years.
While constructing portfolio, one will keep aside for high growth / moderate growth equity and debt. Allocation in stock like Colgate will bring down beta of the portfolio and volatility as a cost for sacrificing return. And mind it as we said earlier, If Colgate can maintain or gain slight market share from here, stock can re-rate above 40x multiple.
One thing can be observed in last few quarters in Colgate is domestic guys are selling. DIIs stake is down from 11% to 7%, a reduction of 400bips which is absorbed by FIIs, whose stake has moved from 15% to 19%. May be this is also pinned from fact that DIIs found 10% return as unattractive while same with low beta is considered fine for FIIs who come with v low cost of capital. 

To conclude Colgate makes sense for investors looking for moderate return with low volatility.

ITC ANTI-THESIS

  As an investor who has taken positive stance on ITC for a long time, it pained to see stock doesn’t move as per expectations, on the contrary valuation became compelling every passing quarter.

In this note, we will try to write why ITC is not performing as per investor expectations. An anti-thesis on ITC to gauge if stock can make turn for better in foreseeable future.

1.      Why ITC despite being formidable cigarette biz trades so low in valuation compared to its FMCG peers: Let’s keep HUL/Nestle out of peer comparison for ITC. MNCs command v different kind of valuation multiple compared to Indian counterparts. However, ITC trades much lower valuation even when compared to Dabur/Marico/GodrejCP (40-50x PER vs ITC sub-20x). When Marico, Dabur & GodrejCP trades at 40-50x, company operates in free market decision making environment of how much price they can charge to customers and what would be their growth look like.

At ITC, growth which accrue to shareholder has been lower compared to what been taken by government in the form of taxes. When shareholder knew company will always take far lower share of profit compared to its potential from future then it should also trade at lower multiple. Consistent increase in taxes and everytime fiscal situation gets worsen, clamour to milk cigarette companies further has made ITC looks like PSU to investors, which will be given only as much oxygen which keeps it alive, rather than becoming stronger with time. 

What might change investor negative perception trickling from Govt. on ITC: Some indication that progressively taxation will not be punitive in nature. Govt. will increase taxes which are near inflation and hence company can grow as per its potential and shareholder gets visibility to benefit from the growth of the company. Since, no government will take such politically unwanted step, ITC investor has to be endure the step-motherly treatment.

However, we don’t understand, government also treat alcohol company in similar way as Cigarette, but United Spirits/United breweries trades at much higher multiple compared to ITC. May be, here the difference comes from being MNC vs ITC with 30% BAT stake is considered domestic conglomerate. 

2.      FII remain constant seller due to ESG concern: This has been confirmed from shareholding data as well. FIIs stake has been reduced from 19.1% to 14.6%. 

But then if one look at Philip Morris, it seems 75% is held by institutions and AMC, then why the FIIs are vacating Indian cigarette manufacturer.

However, point to note that, Philip M and BAT has given up significant value in last 5yr (about 25-30% lower) hence there is global value destruction in the cigarette biz.

FIIs should see Indian market different from developed market, we have growing youth population, improving income level which further improves cigarette affordability.

May be, they see the potential for cigarette consumption will not fructify due to Indian govt and FIIs are hanging up on ITC.

3.      Despite scaling to 3^rd largest Non-Cigarette FMCG, valuation lag its peers : ITC has achieved revenue of 12,844cr revenue in FY20 higher than Nestle and Dabur, it’s FMCG biz is still valued far lower compared to peers.

More than 1/3^rd ITC FMCG revenue comes from Asirwad brand, which is low margin/RoCE product. Hence, despite scaling to may be 4000cr revenue its contribution to EBITDA remain far lower.

Brands which can become competitive among peers in terms EBITDA margin & RoCE, Sunfeast, Bingo, Yippee, once they start contributing higher sales in the overall pie, will lead to overall margin improvement for ITC.

Ideal way to value FMCG business of ITC might be to value it as EV/EBIT instead of valuing it on EV to sales, with multiple which are comparable to Dabur/Marico. Then we will have EV/EBIT multiple of 20-25x and bring down valuation of the segment down to 20,000cr instead of 60-70,000cr when we value it as EV/sales

4.      Remaining Hotel/Paper/Agri doesn’t contribute more than 5% of the overall valuation, hence doing any holding company kind of discount in ITC would be wrong. In other words, markets try to destroy value of cigarette and FMCG business as a means of holdco discount, with a view that management focus is misdirected.

Let’s leave the other parts valuation depressed as other papers and hotel companies are trading in the market, rather than holdco discount.

After all the thought, if we try to put a number on the valuation, it seems market is valuing the company with the following multiples to arrive at the price at which it is trading right now.

Segment	Year	Metric	Value	Multiple	EV	Value per share
Cigarette	FY22	EV/EBIT	16,803	10	1,68,025	137
Non Cigarette FMCG	FY22	EV/EBIT	782	15	11,729	10
Hotel	FY20	Assets Value	7,563	0.5	3,782	3
Paper	FY22	EV/EBIT	1,258	3	3,774	3
Agri	FY22	EV/EBIT	870	3	2,611	2
Total					1,89,921	155
Cash & Eq (FY20)					25,000	20
Fair Value					2,14,921	176

 

Disclosure: Remain invested

Can Coal India withstand competition from 100% FDI

Recently Government has allowed 100% FDI is coal mining. Since the announcement, talks started how coal India will now not be able to sustain the competition and this can be beginning for the end. In this article, we try to understand how it can impact India largest coal miner and whether it makes sense to invest in coal India at current price.

First understand, India coal situation. India produced 730mt of coal in FY19, of which 607mt production was from our national behemoth. Most of the coal production goes to meet demand for merchant power generator, industries like cement and steel sector. India needed 950mt of coal in FY19, so balance 234mt was imported mostly from SE Asian nation and Australia.

Demand Growth India demand for coal is increasing by 5-6% every year, so is the production of coal, hence it can be assumed that coal India was not in position to replace the imported coal. Company is promising for long that we will reduce India's import dependence, but regularly fall behind on meeting the target.

Terms with Buyers Coal India commitment to power generator and industrialist are for long term purchase contract, so one should assume that existing customer of the company will not move committed purchase. They may go for their incremental need which anyway was met from imported coal. Coal India mines are leased for very long term, hence their is no threat on maintaining the production at current 5-6% growth rate. New bidder will target, mine which is not allocated yet or going for renewal. First one need to look at the unallocated mine within the country and mine going for renewal from coal India kitty.

Replaceable Demand: Now, out of 230mt of coal imported, one should assume 100mt requirement is high gross calorific value coal which is unavailable in India. Plus few of the plans are located near port, which is uneconomical to serviced from road /rail network in India. So, half of currently imported coal will continue to be service through import for reason above.

This leaves 100-125mt of coal in current environment which attract the new investment. If that production come, it will be good for India balance of payment and coal India will be largely unaffected. Though this is big size, global mines and investors are moving away from dirty fuel. Miners are not making investment in coal, few investors don't invest in  companies which burn coal disproportionately, Scandinavian countries. Indian govt,as well, want to push renewal energy, most of new capex in power generation has come in renewal sector.

Opportunities for Coal India: Now lets see what coal India can do to become efficient miner. Coal India, faced with incoming competition should take bold decision to aggressively ramp up production and make opportunity size for foreign player from 100mt to even lower. Reduce employee count, coal India employee cost will be 35% of revenue, one of the highest in world. Here, union hold the sway, if coal India ask employee to increase production by 1mt, union will say will need xx more worker, this increase burden of cost and leave limited scope for mechanisation.

Coal India should do something on washeries side, it is very sorry state of affairs. When company came with ipo since then we are thinking washeries will be set up, still washed coal is not even 3%of total production. Washeries, if installed near coal plant, will improve GCV, reduce wastage to travel from mine to steel /power plant and hence reduce cost of transportation.

This can be wishlist, but within PSU good thing is wishlist remain the list and one doesn't have to keep updating it, we can say this should not be in base case to expect improvement from here in future, so question is should one invest in Coal India.

Valuation: Coal India is currently valued at 3x EV/EBITDA and 8% dividend yield. Cash balance is 30% of mcap hence looks like decent investment. Company has given guidance of 660mt production, 9% growth if they are able to achieve even 640mt, valuation will start looking even better.

Risk: Biggest risk is promoter itself. Continuous overhang on stock due to govt divestment. Plus current NDA govt has found innovative way to take money from PSU. Asked ONGC to buy HPCL, hence they take the money and retain the control as well. Minority shareholder of both the companies will be screwed. Government currently is hungry and need fund. Can Govt do similar thing in Coal India, ask the company to buy SAIL or RINL.

Possibility of risk materialising is low: when HPCL was sold, govt stake was 51% in it they can't take much money from HPCL directly and hence use it to take ONGC cash. Here, Govt. hold 70% in Coal India, so if 25000cr dividend is declared govt. will get 70% plus 20% as DDT. In total, they get 22500cr out of 30000cr, 75%. In HPCL leakage was fairly high.

Disc: No investment, doesn't like investment in PSU Co. Money earned by slogging 12hrs shouldn't chase company run by last people.

Changing Trend among Indian Television Audience

There has been huge change in last two decade in the way we use to watch television. It use to be family entertainment and important source of information which is getting heavily disrupted in the modern digital world. I am interested in understanding given the current context, how this industry will shape up in future, what will be the future of key listed players like Dish TV, Zee Entertainment and Sun TV.

Reason for shift from family entertainment to personal choice: There is no denying the fact that entrainment has become more personal. Back in 90s entire family use to watch tv together and now it has shifted to individual staring at small personal screen. Definitely, rise of individualism lead to such shift but also increase in choice of content is important factor.

Back in 90s, there was only one particular show on prime time, hence entire family watch that only thing available on TV. Fast forward that in 2000s, there was one important show at particular time, KBC slot fix for 9PM and Mr. Bachchan would say "9 baj gaye kya" in star commercial reflecting family watching that one thing together. Now, there is plethora of content to please every mood, personality and hence variety of choice means individual with different personality /age group will prefer different content. Hence, era of watching TV together is getting over and this trend is unlikely to get reversed.

Advertisements model on television getting disrupting : Television was great medium for new brands to advertise and create awareness among consumer about new launches. Some products plainly use to show inherent qualities while other use to position their brands as aspirational and create latent demand for their products. The premium brands will showcase consumer in 4 wheeler while the affordable brands will try to make appeal to consumer on 2 wheeler.

Both are again getting disrupted due to digitization. You get to know about product at the click of the button, not only you get to know what companies are claiming about performance but feedback from the real users. Companies also have many avenues to disseminate information about their products. Social media advertising is on the rise. Even to position their products companies use multiple platform and hence the share of television is on decline. However since the overall pot of total advertising revenue from the companies have increased multi-fold, this is not that big negative.

Advertising eyeballs reducing significantly: This is non reversing trend, content watching on television is shifting from traditional cable and DTH to digital. Rise of Amazon prime, Netflix has bring in plethora of good content to television watchers. Consumer doesn't to go through advertisement when they are watching television, this will hurt broadcaster as they draw revenue from two source, subscription from consumer and advertising.

With so much usage of mobile phone, people attention span is reducing dramatically. No one wants to wait for content to upload or buffering, few seconds of advertisement on YouTube is irritating. In such scenario, advertising revenue which accrue from television is on limited oxygen and soon will be history. What may happen is telecom companies and every app on mobile phone track every activity of users and that data is sold to marketeers who can do targeted marketing, like I receive ad on stock market while browsing on Internet.

Content created on bulk getting limited  viewership: A decade back, family soap opera were being watched by almost all age group within the family. Ekta Kapoor was household name, cut across age group.

One broadcaster loosely said once, hum jhola bhar ke content banate hai, 30min episode created everyday which is consumed by Indian audience, the amazon prime and Netflix of the world can't make that much content to satiate Indian audience appetite. This trend is again shifting, though significant people still watch daily dose of opera, but the underlying shift can't go unnoticed. A decade back there was just few national broadcaster, who claimed ownership of Indian audience, now there is so many content provider from Indian and overseas producers, earlier model is definitely is disrupted. It is like earlier youngster were watching only one sports in India, now apart from cricket, people have developed interest in football, tennis even badminton and TT is gaining traction. This shows preference of new audience is more diverse than before or already they are served more granular than earlier.

All this points to a direction that tradition medium of entertainment has to evolve our may slowly move towards extinction.

Gold Glitter Never Fade | Gold Loan Companies: Business model, Strategy and Valuation

Gold Loan business is very old in India, person holding gold use to pledge it for loan for emergency or business purposes.

Gold Loan Market in India: In India, there is about 25000 tonnes of gold, of which 80% is held by temples, household as jewellery and banks reserve. Remaining 20% of the gold, about 5000tonnes is only used as collateral for loan. Of this, 5000tonne, about 80% Gold Loan business is done by local money lender & pawnbroker, which is unorganized lending, only 1000tones gold loan business is done by NBFC and Banks.

Generally gold loan is regarded as emergency or need based loan and their customer base is semi-urban and rural areas. These customers are generally not catered by the regular banking channels and their financing needs are mostly met through unorganized segment. South Indian market, is well penetrated for Gold Loan, somehow the trend of gold financing is more prevalent in South compared to North India. Kerala leads in the business of Gold loan, India’s leading player, Muthoot finance, Manappuram are headquartered in Kerala. Even one of India’s oldest private bank, South Indian Bank, which has large amount of Gold loan book is based there.

Unorganized vs Organized: The unorganized sector lending is done at very high interest rate 30-40%, sometimes at even 50%. These money lenders are not under any regulation from RBI and can do business as they feel like. In comparison to them, Gold finance NBFC use to lend at 20-25% interest rate.

The business of organized gold financing is growing steadily in India for past many years. As organized player indulge into fair practice with borrower, customers from unorganized sector will gradually shift towards organized segment. Since the customer size remain very large in the unorganized segment as we discussed earlier almost 80% is unorganized, this shift will continue gradually for many years to come. Hence, the business for most of the gold finance companies should continue to increase, although slowly.

Operational Parameters Let’s touch upon some operating parameters one should look. Loan per branch, loan per employees or loan officers and loan per customers are three important metrics. When loan per branch is steadily increasing, it means company with similar number of branches and cost structure is doing more business and hence should be earning higher profit. Now a days, company doesn’t need as extensive branch network with the use of technology, company can do larger business from same number of branches, hence we should also look at loan per employee. Another metrics to look at is Loan per customer, since this is small ticket size loan, it should be seen that loan per customer shouldn’t grow beyond nominal GDP growth in India. Faster growth here, should raise a concern that loan are given to customer with higher risk profile.

Key Financial Parameters As next step, we will look at each of the item that’s makes into Profit and Loss account.

Suppose, with every gram of gold, whose price is about Rs 3200 in India, companies can lend some amount to borrower. RBI has set that limit upto 75% of the value of gold. This 75% limit is called Loan to Value (LTV in NBFC companies).

The interest rate at which loan is given is called Yield. Interest rate ranges in the range of 20-25%. In this segment, Muthoot charges lower interest rate compared to Manappuram as the size of the loan at Muthoot is bigger and hence lower interest rate are offered to attract big ticket loan.

2^nd item is Interest cost: This is the interest rate at which gold finance companies borrow from the market. Generally, they borrow from banks, capital market and mutual funds by way of debentures and commercial papers to meet their near term liabilities. Currently, borrowing rate for two large companies lies broadly in the range of 9.0 – 9.5%

So, it looks like these companies makes a very large spread because they are borrowing at 9 – 9.5% and lending at 20-25%. While if you compare the same with banks, they would be earning much lesser spread.

Operationally Heavy Business: There is reason for such large spread in Gold finance companies. Gold financing is very operational heavy business with low ticket size and quick churning of loan. Gold are kept at the same branch where customer deposit their gold, huge operational cost is incurred for doing the business. The loan per customer is very small, average ticket size will be 30000 – 50000, hence it takes high cost for acquisition and managing customers. Both the companies have over 3000 – 4000 branches to conduct the business. So, the opex ratio for gold finance companies is high at 7-8%, which means 7-8cr is spend on operations for loan book of 100cr. with more technologies usage and lesser requirement of cash at every branches due to online disbursement of loan opex ratio will gradually come down. Primarily, there is three item taken as cost in operations of the company. Employee cost, Deprecation and other operating expenses at the branch level.

Once, cost is deducted, we arrive at Pre provision operating profit, also known as PPOP. As we all know, in lending business, there is always a chance that customer will not return money on time. Hence, company has to provide provision for anticipated loss on loan amount. This is widely known as credit cost in NBFC. Generally, in gold finance companies credit cost is very small as gold is very liquid and easily saleable assets. In case, money is not returned on time, lender can sell gold in market and recover their loan amount. After deducting credit cost we arrive at PBT.

Return on Assets, RoA is defined as how much Profit generated in a year over Loan book. RoA is generally high in gold finance companies, somewhere in the range of 4 – 5%. With leverage of 4 – 5x, Companies can take the return on equity easily above 20%, which is very good for any kind of companies in India.

Risk Next, let’s look at the risk which gold finance companies faces, and how they are equipped to deal with those risk.

1. First risk could be from banks. As we saw, gold financing is secured lending and companies are making high spread. It can attract banks to enter aggressively in this space. But banks are not focused on Gold finance, Banks are mostly focused on larger ticket size loan.

2. Rural distress: If Indian rural economy slows down there will be lesser economic activity in the country side and hence less demand for fund.

3. Farm loan waiver: Whenever, we will see distress in rural economy, politician will bring farm loan or rural loan waiver into discussion. This not only increases the credit cost we discussed in P&L, it also distort the credit culture in the country.

4. Price reduction in Gold. Since, gold is the collateral for loan, if gold price comes down, lower amount of loan will be given for the same quantity of gold.

Valuation: Lets spent sometime on valuation. RoE, we calculated in P&L is very important in finding out the fair value for the company. Suppose there is govt securities G-Sec, which gives us yield of 8%. So, we pay pari-pasu for investment or Rs. 100 in G-Sec securities and we take 8% as our base rate of risk free return. Gold Finance companies can generate 20% RoE, which is about 2.5x of risk free interest rate. If we were valuing govt securities at pari-pasu, we can value gold finance companies at 2.5x of net worth or book value. This is only one metrics, to value NBFC, but other than RoE one has to look growth potential in the long term, future risk and competition to see if valuation should be done at higher or lower than 2.5x.

Curious case of Fortis Healthcare

Fortis has been in the news for all the wrong reason. Promoter siphoning money from the listed entity, SFIO investigation in progress, overcharging patent at their hospital etc. This list of the negative news is quite lengthy and hence it's reflected in share price correction recently. But there remain few strength of the Fortis business which makes me believe it should give good return from here.

Here are few of the thoughts on Fortis Healthcare worth reading:

1. Promoter discount has to be adjusted: Fortis valuation has been hit in last few quarters as the company was taking burden of crooked promoter. Now since Singh Bros is no longer in picture, company should be valued normally in the lines of Apollo and other South Asian hospitals.

2. Loss report in Q2 and Q3 should be temporary: This is the same company which was alleged to charge 17lakhs for a dengue patient in Delhi. It was also mentioned how they are overcharging from their pharmacy. Ironical that company who milk their patient so badly is reporting losses. This has to do with their outgoing promoter who has been accused of swindling money. Over the course of next year, profitability should return to normalcy.

3. Strength of the Business (Diagnostic and 2nd largest chain of hospital): Fortis remain 2nd largest chain of hospital in India. Beside that, they also own SRL diagnostics which is much higher valuation business. It also has operation outside India. Combined valuation should be done on revenue per bed basis for hospital business and EV/EBITDA for the diagnostic chain.

4. Restructuring of RHT: RHT owns the hospital run by fortis, this help Fortis to run an assets light model. Fortis even have cross holding in RHT. Since RHT has raised money in Singapore, their cost of capital is lower. They can charge lower annuity for their assets and hence this was win-win situation. Just that it leaves complex structure in place. When promoter integrity is in question, complexity makes it difficult to find out if fund are siphoned. Once new promoter comes in, even if company continues with RHT structure, it will be appreciated by market.

5. SRL diagnostics spin off: Fortis has announced spin off and separate listing of SRL in 2016.  Diagnostics business will be valued much higher multiple compared to full healthcare business. SRL is crown jewel in Fortis business. If management tries to de-merge it now, it will make Fortis standalone bit unattractive to incoming investors. Hence they may want to delay this exercise till the new investor is on board.

6. Investment Banking like transaction without banker: Singh Bros owned ~70% stake in the company 4-5 quarters back, which is now almost zero. Of this 17% is held by Yes bank, rest all is well distributed among institution and general public. When Bajaj Finance wants to raise 4,500 cr they assign three bankers, do roadshow and meet scores of investors. It is amazing to see Fortis is able to do similar exercise with open market operations, such a credibility of exiting promoter. There has to be good intrinsic value in the assets, however that assets hasn't shown desired profitability to reflect fair value.

7. New Owner: Last year, TPG, IHH were rumoured to be interested in buying Fortis stake from Singh Bros. Back then, transaction was assumed will be done at 250 per share. Since then hospital business has been impacted by due to government intervention on stent, knee transplant and controlling drugs prices. However, this has coincided with general re-rating of capital market. Similar kind of bid should again come for Fortis this time.
http://www.livemint.com/Companies/bv3FHECoo9GFHjgPBRIKTO/Singh-brothers-said-to-seek-Rs250share-to-sell-off-Fortis-H.html

8. Healthcare has very very long run way for growth: This shouldn't be doubt in anyone mind that quality healthcare services in India is limited to metros and Tier-1 cities. Things need to improve significantly to put India anywhere near to global standards. As disposable income increases many people will be able to afford quality healthcare services. All small clinics in nearby locality run primarily by reference than by credibility.

9. Valuation: Story for any company is not complete without thinking about valuation. Given so much noise related to accounts it is difficult to assign Fortis value based to published information. However, instead of going wild assumption on valuation, lets make it a simple case. Apollo hospital business (exl pharmacy) revenue stands at INR 2952cr while Fortis hospital business was tad lower at INR 2815 cr in the nine month ending December 2017. Fortis EBITDA was INR 395 cr while Apollo makes INR 332 cr. However, Fortis incur BT cost post EBITDA as well. Beyond that Fortis own SRL with EBITDA run rate of INR 175 cr, which should trade at 25x multiple, should fetch INR 4 - 4.5K cr valuation. While Apollo has Pharmacy business which generated INR 85cr in 9M'FY18. Apollo trades at ~15k cr mcap.

10. Will Fortis be sold off cheaply: IHH & TPG have already shown interest to acquire substantial interest in Fortis. From Fortis side, there was talk to infuse INR 4,000cr for RHT payment. If the dilution is done at current price, current shareholder has to part significant portion of value at Fortis due to dilution at depressed price. hopefully, any fresh funding should go through majority of minority test rather than making preferential allotment to any bidder.

Disc. : All information shared in the article is for information purpose only. This is not to influence any investment decision. Please take advise of your financial advisor before any investment.