This article first appeared in The Edge Malaysia Weekly on October 3, 2022 - October 9, 2022

SEPT 22 and 23 were tumultuous days for IHH Healthcare Bhd’s share price, which tanked to a 52-week low of RM5.80 on Sept 23 following the ruling by India’s Supreme Court on the long-drawn-out legal tussle between Japanese drugmaker Daiichi Sankyo Co Ltd and brothers Malvinder Singh and Shivinder Singh, who used to own Fortis Healthcare Ltd. This raises uncertainties on IHH’s shareholding in Fortis moving forward. The group has a 31.1% stake and intends to raise it to 57.1%.

While meting out a six-month jail sentence on the brothers on charges of contempt of court, India’s Supreme Court also disposed of the contempt of court petition with a direction to the High Court (executing court) to consider issuing appropriate process and appoint forensic auditors to analyse the transactions entered into between Fortis and RHT Health Trust and other related transactions.

Essentially, the mandatory tender offer (MTO), which requires IHH to take up 26% equity interest in Fortis, cannot proceed until the High Court delivers its judgement on the matter.

The knee-jerk reaction by investors to the news that caused IHH’s shares to sink to a 52-week low prompted the healthcare group to clarify the situation on Sept 26. It announced on Bursa Malaysia that India’s Supreme Court had declared that its 31.17% investment in Fortis back in 2018 was undertaken in a fair and transparent manner with no wrongdoing on its part.

The group also said that it is committed to Fortis, which it calls a “transformational acquisition”.

“We remain steadfast in our ability and commitment to execute our business plans to grow our operations and serve the healthcare needs of our patients in India with care and excellence, while protecting the interests of our stakeholders.

Over the last quarter and throughout the pandemic, Fortis has anchored its claim as one of the leading healthcare platforms in India and IHH is committed to stand firm on Fortis’ side to continue this growth journey,” it said.

At the same time, analysts’ reports also emphasise that IHH shares had been oversold on the news. AmInvestment Research opines that the shares are trading at a compelling FY2023 forecast price-to-book value of 1.9 times compared with its five-year mean of 2.3 times.

While one would think that the announcement and assurance from analysts should come as a relief to investors, it did not seem to make a significant impact on the shares that had been sold down earlier. IHH’s shares continue to trade below RM6.

Before it tanked to a low of RM5.80, the shares had been trading between RM6 and RM6.80. Last Thursday, it closed at RM5.92, valuing the group at RM52.13 billion.

Despite the announcement by IHH, the question that lingers is what are IHH’s next steps following the court ruling?

And will the legal tussle continue to put on hold its plans for India? After all, this saga has been running on for close to four years since IHH acquired its controlling stake in Fortis.

If one can recall, when IHH became the controlling shareholder of Fortis, after acquiring a 31.1% stake on Nov 13, 2018, the acquisition triggered an MTO to acquire an additional 26% of Fortis’ total capital from existing shareholders. The open offer was scheduled to commence on Dec 18, 2018.

However, the open offer was halted as it was caught in the crossfire following Daiichi’s lawsuit against the Singh brothers. Daiichi had in 2016 won an arbitration award worth over US$500 million against the brothers in a dispute around Ranbaxy Laboratories Ltd, which was owned by the brothers.

When Indian lenders sold the brothers’ pledged shares in Fortis to IHH in 2018, Daiichi objected and said that the brothers had on oath assured that the Fortis shares would cover the award amount.

Hence, India’s Supreme Court issued a status quo order on Dec 14, 2018, that prevented any parties involved in the dispute from taking any further action until the matter was resolved.

This was followed by an issuance of a suo-moto (on its own motion) notice by the Supreme Court a year later of contempt against Fortis for violation of the status quo order after Fortis acquired RHT’s assets in India on Jan 15, 2019.

When contacted by The Edge, IHH declined to comment saying that it “cannot comment beyond what is publicly disclosed”.

It did, however, mention in its announcement on Sept 26 that it is seeking further advice and is in discussions with the relevant authorities to determine its next steps regarding the acquisition of the additional 26.1% stake in Fortis.

It also said in that same announcement that the judgement by the court in India does not in any way alter its commitment to growing its healthcare operation and serving patients in India.

Looked at in another way, it indicates that the court does not impose any restriction on IHH’s ambition to grow in India.

However, how long the process of getting approvals from the relevant authorities will take is anyone’s guess.

Would its commitment to grow in India serve as some comfort to investors? AmInvestment Research believes so. “Despite various rounds of deferments [regarding the MTO], IHH emphasises its commitment to grow its healthcare operations and serve patients in India. This alleviates concerns that the ongoing deferments could disincentivise IHH from further improving Fortis’ financial performance,” it says.

It is worth noting that since IHH’s acquisition of Fortis in 2018, the reported profit after tax of the Indian healthcare group has improved tremendously. Fortis’ financial year ends on March 31. In FY2018, it reported a loss of Rs63.72 crore (1 crore = 10 million). By FY2020, it reported a profit of Rs513.33 crore.

In FY2021 and FY2022, earnings were affected by the pandemic, declining to RS4.2 crore and then falling into a loss of Rs13.25 crore.

If the MTO is successful and IHH manages to increase its equity stake in Fortis by 26%, there should be upside to the former’s earnings.

RHB Research forecasts a 3% upside to its 2023 forecast core earnings should the MTO be successfully carried out while AmInvestment Research sees a possibility of IHH’s FY2023 forecast earnings increasing by 3.8%.

Despite the uncertainties, none of the 17 analysts tracking the stock has recommended their clients to sell.

For the cumulative six-month period, IHH’s net profit amounted to RM1.11 billion, higher by 29% from a year ago. Meanwhile, revenue improved by 4% from the previous year to RM8.54 billion.

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