IPO

Wednesday, December 16, 2015 Click here for Rating Reckoner
Narayana Hrudayalaya
Affordable for patients, not for investors
CM RATING40/100
Narayana Hrudayalaya Ltd (NH) was founded in 2000 in Bangalore, by Dr Devi Prasad Shetty, who has over 30 years of medical experience including as a cardiac surgeon and has received a number of national and international awards including the Padma Bhushan in 2012.

The private healthcare service provider in India operates a chain of multispecialty, tertiary and primary healthcare facilities. There is a broader network of healthcare facilities, with 23 hospitals, eight heart centers and 25 primary care facilities across a total of 31 cities, towns and villages in India, with 5,442 operational beds and the potential to reach a capacity of up to 6,602 beds. The facilities provided care to over 19.70 lakh patients in the fiscal ended March 2015 (FY 2015).

The presence is mainly in the southern state of Karnataka and eastern India. There are plans to expand to Lucknow in central India and Mumbai in western India, thereby adding 623 beds under management in the next 24 months.

There is strong legacy in cardiac and renal sciences. As many as 51,456 cardiology procedures, 14,036 cardiac surgeries, and 184,443 dialysis procedures were performed in FY 2015. Cardiology and cardiac surgery accounted for 54.3% of the in-patient billed revenues.

Core specialty areas have been expanded to include four additional areas of focus: cancer care, neurology and neurosurgery, orthopaedic, and gastroenterology. Clinical trials are conducted for pharmaceutical and medical equipment manufacturing companies and certain educational and training courses are offered to doctors and paramedics.

The business is operated through a combination of different models: Hospitals that NH own and operate (total four); hospitals and heart centers that NH operate and pay a revenue share to the owner of the premises (seven); hospitals, standalone clinics and primary care facilities that NH operate on a lease or license basis (eight); and hospital management services that NH provides to third parties for a management fee (four).

The mission is to deliver high quality, affordable healthcare services. The core values are represented by the acronym iCare, which encompasses innovation and efficiency, compassionate care, accountability, respect for all, and excellence as a culture. At the same time, NH seeks to generate a strong financial performance and deliver long-term value for the shareholders through the execution of its business strategy.

NH generated 90.72% of the revenues from the 19 hospitals offering multispecialty and super specialty services, 7.30% from heart centers and the remaining 1.98% from management fees received from the four managed hospitals, ancillary businesses and other standalone clinics and primary care facilities in FY 2015.

NH had a daily average of 534 in-patient admissions and 4,477 out-patients, and performed a daily average of 312 surgeries and procedures (of which 39 were cardiac surgeries, 142 catheterization laboratory procedures, and 2 kidney transplants), and 513 dialyses in the 15 months ended June 2015.

The Offer and the Objects

The issue comprises offer for sale (OFS) of 2.45 crore equity shares of Rs 10 each, which at the lower price band of Rs 245 per share works out to Rs 600.25 crore and at the higher price band of Rs 250 per share is Rs 612.50 crore. The selling shareholders comprises promoters and promoter group, offering about 0.41-crore shares, and other share holders (JP Morgan Mauritius Holdings, Ambadevi Mauritius Holdings, Ashoka Investment Holdings) offering about 2.04-crore shares.

The minimum bid lot is 60 equity shares and in multiples of 60 equity shares thereafter. The issue is made through book building and will open on 17 December and close on 21 December.

The aim is to achieve the benefits of listing the equity shares on the BSE and the NSE through OFS.

Strengths

The healthcare service market comprises seven beds per 10,000 people as against the global medium average of 27. Changing demographics, increasing affluence, greater health awareness, increase in lifestyle-related diseases, and increasing health insurance coverage are leading to increase in demand for quality healthcare services, particularly tertiary healthcare services.

The unique business model of affordable healthcare services distinguishes from peers.

An asset-light model is used for expansion of the hospital network, enabling optimum utilization of funds. The partners --- be it government or trusts --- own the fixed asset. Investment is only in medical equipment and operates and manages the hospital and shares a small portion of the revenues with these partners. This calibrated approach has allowed effective capital cost per bed of Rs.25.5 lakh end March 31, 2015. The niche strategy allows healthcare services at affordable rates.

The costs of consumption of drugs and medical and non-medical consumable items gets reduced due to centralized procurement program that allows maximization of utilization of drugs and lower the overall cost of consumption due to economies of scale and greater bargaining power that comes with a larger network.

Of the 23 hospitals, six are matured, operating for more than five years and are operating at around 60% of capacity and generate around 24% earnings before interest, depreciation, tax and amortization (Ebitda) margins. The three hospitals are operational for less than five years and are working at around 45% of capacity, generating around 5% Ebidta margins. The remaining 14 hospitals are operating at negative Ebidta and are operational for less than three years. Typically, a hospital breaks even in three-four years and then the operating leverage starts. Thus, there is plenty of scope for margin improvement going forward.

Weaknesses

Nearly 58% of the revenues came from three major hospitals: two in Bangalore and one in Kolkata end March 2015.

Around 20% of the revenues were derived from government-sponsored health schemes requiring government compliances and some benefits to be passed on to patients. The receivables of these services come from the state and Central governments take more than 90 days.

Consistent negative cash flows in the past four years due to investments in green-field and brown-field acquisitions.

Less than 5% return on equity (ROE) generated over the past five years.

Valuation

NH has been growing its revenues at 30% compounded annual growth rate over the past four years. The operating profit margins (OPM) have also been maintained at11% to 12% (except in FY 2015). However, high and rising interest and depreciation have left little at the net profit level, with the highest EPS of Rs 1.6 in FY 2014.

Net consolidated revenues grew 20% to Rs 1363.85 crore and the OPM at 9.5% in FY 2015. Due to acquisition of hospitals and related integration and marketing costs, there was consolidated loss of Rs 10.86 crore at the profit after tax (Pat) level. Consolidated net sales stood at Rs 783.36 crore and consolidated Pat stood at Rs 12.49 crore in the six months ended September 2015. Given the seasonality of business, H1 of FY 2016 EPS is not annualized. Book value stood at around Rs 39 end September 2015.

Enterprise value (EV)/ Ebidta stood at 38.9, EV/Sales 3.9 and EV/operational bed Rs 1 crore and return on capital employed 4.6% end March 2015. For Apollo Hospitals, the ratios stood at 26.6, 4, Rs 3.3 crore and 10.2%, respectively, and for Fortis Healthcare 43.3, 2.4, Rs 2.8 crore and negative 0.3%, respectively.

Narayana Hrudayalaya: Issue highlights

For Offer for Sale Offer size (in Rs crore)
- On lower price band600.25
- On upper price band612.50
Offer size (in no. of shares )2.45 crore
Price band (Rs)*245-250
Pre & Post issue capital (Rs crore)200.00
Pre-issue promoter and promoter group shareholding (%)66.85
Post-issue promoter and promoter group shareholding (%)64.85
Issue open date17/12/2015
Issue closed date21/12/2015
ListingBSE,NSE
Rating 40/100

 Narayana Hrudayalaya: Consolidated Financials

1103(12)1203(12)1303(12)1403(12)1503(12)1509(06)
Total Sales477.58657.78839.291095.121363.85783.36
OPM (%)11.7%12.5%11.3%11.0%9.5%11.1%
OP55.6682.2294.90120.09129.1987.20
Other in. 2.632.901.5222.397.745.20
PBDIT58.2985.1296.42142.48136.9392.40
Interest5.339.2416.6128.3640.8917.14
PBDT52.9675.8879.81114.1296.0475.26
Dep.32.1437.2346.0057.4466.6935.20
PBT 20.8238.6533.8156.6829.3540.06
Tax (including Deferred Tax)7.1812.939.9721.3417.5214.85
PAT13.6425.7223.8435.3411.8325.21
MI0.00-0.030.96-3.63-22.6912.72
PAT after MI13.6425.7524.8031.71-10.8612.49
EPS (Rs)*0.71.31.21.60.0#
*EPS is on latest equity capital of Rs 204.36 crore of face value of Rs 10 each.
# EPS not annualised due to seasonality of business.
Figures in crore.
Source: Capitaline Database

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