Verdict: Nothing left on the table for prospective investors

Rs. 2,144 cr IPO: 91% is OFS and 9% fresh issue, to repay Rs. 150 cr debt (fresh issue quite needless as company is already cash rich). IPO is primarily to facilitate PE fund General Atlantic halve its 41% stake, as this accounts for 62% of total issue.

IPO Date: Wed 16^th Jun to Fri 18^th Jun 2021

Price band: Rs. 815-825 per share

Post Issue Mcap: Rs. 6,600 cr implying a heavy dilution of 32.5%

Listing: 28 Jun 2021

2,500 Operational Beds across 9 Hospitals in Andhra & Telangana

KIMS is a regional hospital chain, clocking high occupancy rates of ~79%, thanks to various health schemes of state governments, especially in Andhra Pradesh, where 50% of its beds are located. During FY21, patient footfall dropped 20%, but revenue grew 18% YoY to Rs. 1,330 cr, as average revenue per operational bed (ARPOB) rose 13% YoY due to covid, improved surgery mix and 4 hospitals or ~900 beds added in last 4 years maturing.

PBT Doubled in FY21

While overall ARPOB improved 13% YoY in FY21, 1,000-bed Secunderabad hospital, accounting for company’s 40% bed capacity, reported 47% jump in ARPOB to Rs. 38,500, improving company’s EBITDA margin to 28% from 22% in FY20. Operating leverage at flagship hospital is vital for profitability of a hospital chain, and this worked in company’s favour in FY21. PBT for FY21 doubled to Rs. 279 cr, leading to an EPS of Rs. 26.4 from Rs. 15.9 in FY20.  

Low ARPOB a challenge

Although ARPOB rose 13% in FY21, it rose only 7% since H1FY18, in a period when Apollo and Narayana clocked 20% growth in ARPOB, as company added more hospitals in tier 2/3 towns. Due to this, in absolute terms, its ARPOB of Rs. 20,600/day is much lower than 27-33,000 for peers Shalby, Narayana, Aster DM India and HCG and Rs. 39,000 for Apollo. While KIMS is now looking to expand into metros of Chennai and Bengaluru, which should increase ARPOB, the journey may well be seen challenging due to (i) higher cost structure for both capex and operations and (ii) lack of ‘home turf’ advantage .

Fully Priced vis-à-vis Peers:

At 825, company’s m cap will be Rs. 6,600 cr, leading to EV/bed of Rs. 2.6 cr, which is 15-20% higher than peers, even after accounting for higher occupancy-led profitability. EV/bed ranges between Rs. 1.4-1.8 cr for peers Narayana, HCG, Shalby and Kovai Medical.

As KIMS’ new hospitals reported higher occupancy due to covid, as also, maturing organically, profitability improved in FY21. But, going forward, hospital addition in new cities will impact margins, as typically a hospital takes ~4 years to mature, hinting that current margins may have peaked out. In this backdrop, FY21 PE of 31x also appears stretched for a regional player.

Hospital stocks have hardly created investor wealth, with Shalby, Aster, Healthcare Global still ruling below IPO price even after 3 years. Moreover, valuation of entire healthcare sector comprising diagnostic chains, hospitals, pharmaceutical manufacturers, sky rocketed during covid and now appears to have ran ahead of fundamentals, leading to an overall cautious view.

Conclusion:

Sustaining the profitable growth in future appears challenging for a regional hospital chain like KIMS. Fully priced issue after a positive covid impact does not leave much on the table for prospective investors.

Note:

We have not given ‘subscribe’ to any of the 4 IPOs currently open, as it is important to not get carried away by bullish prospects or superlative pricing, as either may lead to a wrong investment decision for one’s portfolio.

Grey Market Premium (GMP) of KIMS: Grey Market Premium of Krishna Institute of Medical Sciences is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.