Shalby Hospital IPO Review :Is it healthy to invest in it?

About the Issue

The upcoming IPO of Shalby Hospitals comprises of fresh issue of Rs 480 crore and offer for sale (OFS) of Rs 24.80 aggregating Rs 504.80 crore. The face value per equity share is Rs 10. The issue price band for the offer is between Rs 245-248 per equity share. The minimum lot size is 60 shares. The issue will remain open from December 5 to December 7, 2017. Post allotment, the company will get listed on both BSE and NSE.

Purpose of the issue

The company will not receive any proceeds from the OFS. The proceeds will be received by the selling shareholder; i.e. the promoter Vikram Burman who plans to sell 10 lakh shares at the upper price band.
The net proceeds from the fresh issue would be utilised for -

- Repayment or prepayment in full, or in part of certain loans availed by the company
- Purchase of medical equipment for existing, recently set up and upcoming hospitals
- Purchase of interiors, furniture, and allied infrastructure for upcoming hospitals
- General corporate purposes

Company Background 

Shalby Hospitals is a multi-specialty chain of hospitals, headquartered in Ahmedabad. The hospital chain offers quaternary healthcare services to patients in various areas of specialisation such as orthopaedics, complex joint replacements, cardiology, neurology, oncology, and renal transplantations. As on June 30, 2017, it had 9 operational hospitals with an aggregate operational bed count of 841 beds. It had a 15% market share of all joint replacement surgeries conducted by private corporate hospitals in India in 2016. 

The company has domestic and overseas outreach through a network of hospitals in India, and outpatient clinics and Shalby Arthroplasty Centre of Excellence (SACE) located in India, Africa, and the Middle East. Having strong presence in western and central India and focus on tier-I and tier-II cities, it operates across five states, the outpatient clinics operate across 37 cities in 12 states in India, and SACE centres are present in seven cities in six states in India. It is also expanding in western and central India with hospitals being set up in Nashik and Vadodara. 

This hospital has specialised in some techniques named ‘OS Needle’ and ‘Zero Technique’ bought in by the promoter doctors. Through OS Needle, it has been successful in simplifying soft tissue procedures, thereby reducing the risk of infection and the high rates of failure that once existed while undertaking orthopaedic surgeries. Zero Technique is a surgical procedure that involves minimum incision during the surgery, thereby reducing infection rates and surgical time required to complete a total knee replacement surgery. 

Apart from the focus on orthopaedics, the hospitals provide advanced levels of care across various specialties such as neurology, cardiac care, critical care, oncology, and nephrology.

Industry Outlook

The Indian healthcare industry was estimated to be Rs 9.2 trillion in 2016; growing at a CAGR of 14-15% over FY11-15. The healthcare industry is expected to grow at a CAGR of 15-16% during FY16-20 and expected to reach Rs 17.2 trillion in 2020. The healthcare delivery segment is largely driven by private sector players and occupies a major share of nearly 70% in the total number of hospitals; out of which organised private corporate hospitals comprise less than 10%. 

Deficient health infrastructure and lack of healthcare workforce, increasing population and life expectancy, increasing urbanisation and healthcare awareness, growing prevalence of lifestyle disease are some of the growth drivers that can boost the healthcare industry in India.

Looking at the orthopaedic segment statistics, to serve orthopaedic patients in India, over 10,000 orthopaedic surgeons are registered with the Indian Orthopaedic Association (IOA); another estimated 10,000 orthopaedic surgeons are not registered with the IOA. Hence, the ratio of orthopaedic surgeons to total population of India is around 1 per 66,300 people. There are only 1.4 to 1.9 joint replacement surgeons per 100,000 people above 45 years of age in India. This skewed ratio shows the need for such surgeons and requirement of efficient facilities.

Financial Performance

As we can see, the company’s revenue is growing consistently since past five years. Operational beds have been increasing but these dipped in FY17. Operating margin is stable and stands in range of 19-24%. Its PAT margin for FY17 stood at 19.1%. The company is into expanding its multi-speciality projects and hence margins would be under pressure. But, once all the projects get executed and reach break-even levels, the pace of profitability will rise.

Valuation and peer comparison

Please note: Market price for calculating P/E is closing price of Nov. 29, 2017 

Healthcare Global Enterprise is trading at highest P/E whereas Fortis Healthcare is trading at lowest P/E. Apollo Hospitals and Narayana Hrudayalaya are trading at the medium level. As compared to these listed peers, we can say that the company is reasonably priced. We see that the company is providing higher returns as against its peers, which shows it as an investor-friendly company.

Shalby Hospital Strengths

1.  Leadership in orthopaedics and strong capabilities in other specialties;
2.  Integrated and scalable business model enable company to provide comprehensive healthcare solutions through a network of multi-specialty hospitals, outpatient clinics, and SACE;
3.  Company has an established presence and strong brand recall in Gujarat, and an emerging presence in western and central India;
4.  Track record of consistent growth in revenue and profitability;
5. Ability to attract quality doctors, nurses, paramedical, and other staff;
6. Experienced and qualified professional management team with strong execution track record.

Risks and Concerns
Here are some risks and concerns highlighted by brokerage houses:-

1.  High proportion of revenue generated from two hospitals SG Shalby and Krishna Shalby
2.  High dependence on one field of specialty i.e. orthopaedics for a substantial portion of revenue
3.  Reliance on third party suppliers and manufacturers for its equipment, reagents and drugs
4. Change in government policies that relate to patients covered by government schemes
5.  Increasing competitions from other hospitals and healthcare facilities
6.  Business is characterised by periodic technological changes

Our View

Looking at the growth in revenue and profitability, we can say that the company is doing well. As expansion plans are in process, we expect growth to be at slower pace and margins would be under pressure. The company follows an asset-light model which helps it in controlling the operating costs. The government has focused on healthcare and increased the health budget this year. But, Government has capped prices of knee implant which could be risky for the industry. We see that the overall healthcare and hospitality industry has good prospects. The company’s valuations are fair and thus, considering all these factors, investors may subscribe for the IPO but with limited exposure and long term view.

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