IPO Analysis: Narayana Hrudayalaya

After a huge response of two healthcare companies IPO of Alkem and Dr Path Labs, Narayana Hrudayalaya (NHL) has decided to launch its initial public offering (IPO) on December 17. NHL is one of the leading private healthcare service providers in India, operating a chain of multispecialty, tertiary and primary healthcare facilities. The issue will close on 21st December 2015. The price band at which company is offering its equity share is Rs 245-250 per equity share and aims to raise Rs 630 crore at upper price band by issuing a 2.45 crore equity share of Rs 10 each through offer for sale by promoters and existing shareholders. The offering consists of 12 per cent of the paid up capital of the company and will give the company a valuation of around Rs 5,000 crore. Minimum application is to be made for 60 shares and in multiples thereon, thereafter. The Book Running Lead Managers to the issue are Axis Capital, IDFC Securities and Jefferies India.

Investors who are selling out are Ashoka Investment Holdings Ltd (up to 6.29 lakh shares), Ambadevi Mauritius Holding Ltd (up to 18.86 lakh shares), JP Morgan Mauritius Holdings IV Ltd (up to 12.26 lakh shares), among others. Promoters Devi Prasad Shetty and Shakuntala Shetty are selling 2.4 lakh shares each.

NHL was founded in 2000 by the Promoter Dr Devi Prasad Shetty, who has over 30 years of medical experience, including as a cardiac surgeon. NHL has a network of 23 hospitals (multispecialty and superspeciality healthcare facilities which provide tertiary care), 8 heart centres (super specialty units which are set-up in a third party hospital) and 24 primary care facilities (including clinics and information centres). The company operates 31 hospitals and 24 primary care facilities across India, with 5,442 operational beds and the potential to reach a capacity of up to 6,602 beds. The company earned 45.6% of revenues from the Karnataka cluster in FY15, 30.2% from eastern cluster and 12.1% from western and central clusters. New NHL hospitals are coming up in Vaishno Devi shrine in Jammu and Kashmir, Lucknow, Bhubaneshwar and Mumbai.

The company runs its business on an asset right model, where partners own the fixed assets and NHL owns the medical equipment, and operates and manages the hospital has helped them to establish themselves as a preferred partner for governments owing to scale, track record, and ethos of high quality affordable care. NHL’s hospitals has more number of general beds than private beds (General beds to private beds ratio is around 70:30 compare to 10:90 ratio of other private for-profit hospitals). Therefore, its capital cost per bed is Rs 25.5 lakh, which is lower than the industry average. The business growth is expected to come from increasing beds and higher patients’ turnover.

Financial front, revenues grew at a CAGR of 30.0% in FY11-15. The contribution from top five hospitals by revenue was 67.5% in FY15 compared to 80.5% in FY13. EBITDA margins contracted around 218 bps to 9.5% in FY11-15 mainly due to operating loss registered in newer hospitals. However, NHL’s mature hospital (i.e. maturity over 5 years) margins were at 23.5% in FY15. Management believes, as more and more of remaining hospitals move into the bracket of maturity over 5 years then EBITDA margins could move towards a range of 23-25% levels and occupancy levels also could trend upward towards 60-65% levels leading to considerable growth in revenue and profitability.

On valuation front, the company demands three times its estimated revenues for FY16. This is lower than the valuation commanded by Apollo Hospitals which is valued at 3.6 times of its annualised H1FY16 revenues. When compared on EV/EBIDTA basis the issue will be available at 27x of annualised H1FY16 as against 27.7x of Apollo Hospitals.

Looking at the company’s fundamentals and valuation we believe the subscriber should avoid this IPO by short-term investors because we don’t see the listing gain. Company has demanded same valuation as Apollo Hospitals. If you want to subscribe for a long-term vision then may go forward.