Ahmedabad-based Shalby Hospitals opened its initial public offering (IPO) on Tuesday. The price band has been fixed at Rs 245-Rs 248 per equity share and on offer are up to 1.95 crore fresh shares aggregating up to Rs 480 crore along with up to 10 lakh shares being sold by promoter Vikram Shah Burman. This implies market capitalisation of Rs 2,680 crore at the upper band. The multi-speciality hospital has already raised a little over Rs 150 crore from its anchor investors, including Goldman Sachs, Global Markets, HSBC Global Investment Fund, Reliance Nippon Life Insurance Company, Nomura Singapore Ltd and SBI Life Insurance Company. Here are four reasons to consider subscribing to the IPO before it closes on December 7:
According to The Economic Times, Shalby's revenue grew at 9.6% a year since FY13 to Rs 325 crore in FY17. In fact, it's up 14% from the previous fiscal, and is reportedly Rs 89 crore for the first quarter of FY18. Meanwhile, its operating profit (EBITDA) rose 14.6% a year to Rs 79.5 crore between FY13 and FY17 while its operating margins remain the range of 19-25%. The oldest hospital at Ahmedabad (SG Shalby) has an EBITDA margin of 42 per cent.
The issue is priced at 42.8 times Shalby's FY17 earnings and 41.1 times it's EV/Ebitda at the higher limit of the price band. "SHL is fundamentally strong and well-managed company and at P/E (x) of 42.8 (considered post issue EPS), the issue is available at attractive valuation. Thus, we assign 'subscribe' rating to the issue," Choice Broking reportedly said in its report.
According to brokerage reports, Shalby has 11 multi-specialty hospitals with a total 2012 beds and an operational bed count of 841 beds. So it has an established presence, which is another notch in the worth-subscribing column. Moreover, it holds 15% of the domestic market share in joint replacement surgeries among private hospitals. "The company has leadership in orthopaedics with integrated and scalable business model enhancing patient reach and is experienced player with longstanding presence .Hence, we recommend "Subscribe" on issue for long term," said Hem Securities in its report.
Moreover, with Shalby reportedly looking to expand to northern and eastern India, its earnings are likely to increase as occupancy at new hospitals improves.
Attractively priced compared to peers
Shalby's valuations are at a discount to its peers such as Apollo Hospitals, Narayana Hrudayalaya and Healthcare Global. "At this valuation, the issue is attractively priced compared to a close peer Narayana Hrudayalaya, which is trading at 72 times P/E and 27.1 times EV/Ebitda. Shalby's RoE of 26.6% is better compared to peers' average of 11.8% for FY17. Considering robust growth, high return ratios, strong balance sheet and future prospects, investors can be advised to subscribe to the issue. There is an underlying assumption that Shalby would maintain healthy growth rates going ahead," said the report from Centrum Broking.
The company has been able to maintain higher margins and RoE than its peers because of several cost-efficiency measures, such as lower capital expenditure per bed and higher beds to operation theatre. As Axis Capital noted in its report, the company incurs lower capital expenses by making optimal use of the available built-up area in their hospitals. Furthermore, the procurement of medical consumables, in proportion to sales, reportedly dropped to 20.5% in FY17 from 29.1% in FY13.
Beware of the risks
Only those with a decent risk appetite should consider subscribing to this IPO because analysts also mention a few possible red flags. For instance, Gujarat accounts for 80% of the hospital operator's revenue. Moreover, a whopping 77% of revenues come from just two Shalby hospitals. So any change in government policies relating to patients covered by government schemes or increased competition from other hospitals and healthcare facilities could spell bad news for the company. The company is also rapidly expanding to new cities where the average revenue per bed may be lower.
"At present, the company is dependent on one field of specialty for a substantial portion of its revenue, i.e. orthopaedics. In order to reining the higher medical cost, the government has recently capped the cost of knee replacement and heart surgery, which could be risky for the health care industry as the move has the potential to limit the margins," said SMC Research in a report, although it overall maintained a subscribe stance.
Edelweiss Financial Services Ltd, IDFC Bank Ltd and IIFL Holdings Ltd are managing the Shalby IPO and the funds raised will be used mainly for debt repayment. According to Mint, due to strong expansion the company debt has increased to Rs 310.9 crore in the first quarter of FY18 and debt to equity ratio increased to 1.1 from 0.3 in FY14. The company will use Rs 300 crore from the IPO kitty to retire the debt, which would reduce Rs 27 crore of finance cost in FY18 and make the company almost debt free. The rest of the proceeds will be used for purchasing medical equipment worth Rs 63.58 crore for existing and upcoming hospitals and for further expansion.
As of 12.30 pm, the IPO has received bids for 470,460 shares against the total issue size of 14,521,686 shares, according to NSE data.