Dr. Agarwal's Health Care
IPO Size: Rs. 3,027 cr
- Fresh Issue of Rs. 300 cr to repay Rs. 195 cr debt (despite being net debt free)
- Offer for Sale (OFS) of Rs. 2,727 cr - 80% by the investors Temasek and TPG (62% combined stake to drop to 43% post IPO) and 20% OFS by the promoters (38% to shrink to 32%)
Price band: Rs. 382-402 per share
M cap: Rs. 12,698 cr, implying 24% dilution
IPO Date: Wed 29th Jan to Fri 31st Jan 2025, Listing Wed 5th Feb 2025
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
India’s Largest Chain of Eye Hospitals
Established in 1957 by a Padma Bhushan ophthalmologist, Chennai-headquartered Dr. Agarwal’s Health Care runs 209 eye hospitals / clinics, under a hub-and-spoke model. Nearly 90% of Rs 1,332 cr revenue is generated in from India and 10% from Africa. Surgeries (mainly cataract) account for 65% of company’s revenue, optical and pharma products 20%, balance through consultation.
Growth Opportunity not as ‘Rosy’?
Present Rs. 37,800 cr Indian eye care industry is very fragmented with <15% being organized. Industry is expected to grow at 12-14% going forward, pegged to be the fastest-growing super-speciality, but this appears skeptical, as volume for cataract surgery (bulk of revenue) is expected to grow at only 4% whereas surgery realisation have remained constant in the past few years.
Volume-Led Growth
Revenue jumped from Rs. 700 cr in FY22 to Rs. 820 cr in H1FY25, led by (i) new facility addition in India - 30 added in H1FY25, 42 in FY24 and (ii) higher volume of surgeries. However, average realization per surgery, similar to average realization per operating bed (ARPOB) for hospitals, has remained more or less stagnant (~Rs. 51,000) in the past 18 months.
Very High Depreciation and Lease Rentals
Combined depreciation and lease rental costs of Rs. 266 cr in FY24, represents 20% of revenue. This is much higher than listed hospital chains, averaging at 8%. As a result, Dr. Agarwal’s PAT margin of 5-7% is significantly lower than mid-teens net margin for KIMS, Jupiter Life, Rainbow Childrens, Yathartha. Due to difference in business model, an EV/EBITDA comparison becomes inaccurate.
‘Nothing Left on the Table’ Pricing
Since H1 represents about 40% of annual profits, H1FY25 PAT of Rs. 40 cr leads to FY25E PAT of close to Rs. 100 cr. Even on a very optimistic PAT of Rs. 140 cr for FY26E, 91x PE on one year forward is seen very aggressive. Most mid-sized hospital peers such as KIMS, Jupiter, Rainbow, are trading at PE multiples between 44x to 55x. Making money from these levels looks extremely tough, especially in current market conditions.
72% Subsidiary already BSE-Listed
Company’s 71.9% subsidiary Dr. Agarwal’s Eye Hospital is already listed on BSE, with a m cap of Rs. 2,250 cr. The subsidiary contributed 70% of parent’s H1FY25 PAT and trades at a PE multiple of 40x. When price is already discovered in public market, IPO at double the PE multiple looks astonishing. Also, company plans to merge the subsidiary with itself in the next 12 months. Hence, an arbitrage play is ruled out on uncertain merger ratio.
Low Promoter Holding
Given pre-IPO promoter holding of only 38% and Rs. 130 cr net cash surplus, fresh issue looks like an unnecessary dilution. If the business is asset light, wonder cause for such low promoter holding!
Also, post IPO, promoter holding will slip to just 32%, with 43% stake with 2 financial investors having a selling-overhang, post expiry of 6 month lock-in period.
29th Jan 2025 at 06:18 pm
29th Jan 2025 at 01:10 pm