Verdict: An Unhealthy Choice!

IPO Snapshot:

Aster DM Healthcare is entering the primary market on Monday 12^th February 2018, to raise Rs. 725 crore via fresh issue of equity shares of Rs.10 each and an offer for sale (OFS) of up to 1.34 crore equity shares by the promoter, both in the price band of Rs.180 to Rs. 190 per share. Representing ~12% of the post issue paid-up share capital, total issue size is Rs. 980 crore at the upper end of the price band, of which, OFS portion is Rs. 255 crore. Issue is closing on Thursday 15^th February and listing is likely on 26th February.

Company Overview:

Dubai and Kochi headquartered Aster DM Healthcare provides healthcare services through its network of 19 hospitals (aggregating 4,754 beds), 98 clinics and 206 retail pharmacies in GCC/ Middle East and India, with hospitals accounting for 49% of H1FY18 revenue of Rs. 3,100 crore, clinics 26% and pharmacies 25%. Middle East region, comprising of 867 beds across 9 hospitals under Aster and Medcare brands, 90 clinics under Medcare, Aster and Access brands and 206 retail pharmacies, accounts for ~80% of revenues, with significant concentration in UAE alone (2/3^rd of company revenue). India operations, with 3,887 beds across 10 hospitals under several brands, such as Aster, MIMS, Aster Adhar, Aster CMI, Ramesh and Prime located in South India and Maharashtra, 7 clinics in South India, accounted for only 19% of H1FY18 revenue, up from 11% in FY15. This company is a classic case of Pareto principle, wherein, 20% of the beds in Middle East account for 80% of revenues, due to 6x average revenue per operating bed per day (ARPOB) of Rs. 1.49 lakh in the Middle East vis-à-vis barely Rs. 0.23 lakh in India. Presence in tier 3/4 towns in India has also kept average realisations low domestically. Company also has one clinic at Philippines.

Financials:

Company’s financial performance is not too encouraging. While revenue grew at 33% CAGR from Rs. 1,922 crore in FY13 to Rs. 5,931 crore in FY17, in line with 33% rise in bed capacity during this period, EBITDA growth was much slower at just 8%, from Rs. 272 crore in FY13 to Rs. 369 crore in FY17, as EBITDA margin contracted sharply from 14% to barely 6%, in a span of just 4 years, due to rising % of employee cost to sales (from 27% in FY13 to 35% in FY17). As company went on a bed addition spree, burgeoning debt levels and high depreciation burden plummeted PBT before exceptional gains to negative Rs. 307 crore in FY17, from Rs. 38 crore in FY16 and Rs. 306 crore in FY15. H1FY18 was no respite with respect to financial, as EBITDA margin remained constant at 6.3% on revenue of Rs. 3,122 crore, with a negative PBT of Rs. 66 crore. Company attributes slippage in performance to (i) provisions from receivables in Saudi Arabia, (ii) conscious shift to private insurance patients in Middle East and (iii) impact of new hospitals and clinics. However, it is important mention here that bed occupancy rates in the Middle East have been on a decline – from 65% in FY15 to 51% in H1FY18. Also, as the company expands capacity, financial pressure of new facilities will continue in the medium term, as it has set an ambitious target of increasing bed count by 35% over the next 4 years and it typically takes an average of 2-3 years for a greenfield hospital to turn EBITDA positive and about 5 years for operating leverage to kick-in. Hence, the hospital business has a very long gestation period.

After accounting for exceptional gain of Rs. 596 crore, towards extinguishment of financial liabilities and write back of contingent consideration, FY17 reported PAT stood at Rs. 267 crore, of which, company’s share was Rs. 199 crore. H1FY18 net profit for company shareholders was negative at Rs. 76 crore. The last time company reported PAT (excluding exceptional gains) in the green was in FY15, when EPS was at Rs. 3.37. 

As of 30-9-17, net worth stood at Rs.1,813 crore, whereas net debt was at Rs. 2,718 crore, leading to a very high debt equity ratio of 1.5:1, which has been on an upward trajectory since FY13, when it hovered at 0.23:1. One may argue that post IPO debt equity ratio may contract to 0.85:1. But that is still very high, given that company is yet to operationalize many beds (only 3,584 beds operational of total capacity of 4,754 as of 30-9-17) which will need resources, besides increasing bed count by 35% as cited above, which will again strain the balance sheet. 

Capitalizing on mandatory insurance in GCC states (ex-Saudi), company has been able to fuel its growth so far. However, foreign ownership restrictions, severe oil price fluctuations and economic and political changes affecting Middle Eastern countries can act as severe dampeners in the future.

Objects of Issue and Shareholding Pattern:

Fresh issue proceeds of Rs. 725 crore will be used for debt repayment (Rs. 564 crore), purchase of medical equipment (Rs. 110 crore) and general corporate purposes (Rs. 51 crore). Dr. Moopen’s private company holds 43.28% stake as the promoter, which will drop to 37.4% after the IPO. Combined holding of 4 PE investors (Olympus, Rimco, IVF and True North) will reduce to 44.8% post IPO, as none of them are participating in the OFS. Balance stake is held by senior management and employee welfare trust.

Valuation:

At Rs.190 per share, company’s market cap and enterprise value will be Rs. 9,600 crore and Rs. 11,190 crore respectively, which leads to EV per operational bed of Rs. 3.12 crore and EV/EBITDA multiple of 25x, based on FY18E earnings, which is expensive, basis below peer comparison:

Note: Aster DM’s PE multiple is not arrived at due to losses in H1FY18, FY17 (core) as well as in FY16. Fortis Healthcare is not taken into account below due to corporate governance / strategic developments surrounding the company.

^post listing

Peers such as Apollo, Narayana, Healthcare and recently listed Shalby report EBITDA are in double digits, while Aster reported at six-odd percent for the past 18 months. Moreover, leverage on Aster’s balance sheet is on the higher side, and will remain high post IPO too, whereas few other hospital companies are reporting negligible debts. Aster DM’s EV per operating bed of Rs. 3.1 crore is the highest in the peer set above. Also, EV/EBITDA multiple of 25x is not very comforting, as largest hospital player Apollo with 8,700 operational beds and 2,700 pharmacies is ruling at an EV/EBITDA multiple of 22x, despite consistently reporting bottomline in the green. EV/EBITDA multiples of 25-26x are justified for Healthcare Global and Shalby since both have much superior EBITDA margins. While Narayana Hrudayalaya has the highest EV/EBITDA multiple in the above table, its EV per operating bed is the lowest, so isits debt equity ratio of barely 0.3:1. Thus, Aster DM’s asking valuation is quite aggressive.

Conclusion:

While retail pharmacy business of Aster DM has shown improvement in financial performance, hospitals have been a drag in the immediate past and quick turnaround is nowhere in sight. Operating losses, high leverage, long gestating period for new business are some of the drawbacks of the issue. Unattractive pricing doesn’t help either. Hence, considering weak fundamentals coupled with uncertain secondary market conditions, it will be prudent to given this IPO a miss.

Disclosure: No interest.