IPO Size: Rs. 1,581 cr

• 82% is offer for sale (OFS) by CDC (comprising 60% of OFS) looking to halve its 30% stake and balance by promoter group
• Rs. 280 cr is fresh issue for (i) Rs. 170 cr capex towards new hospitals (ii) debt repayment Rs. 40 cr debt

Price band: Rs. 516-542 per share

M cap: Rs. 5,500 cr, implying 29% dilution

IPO Date: Wed 27^th Apr to Fri 29^th Apr 2022, Listing 10^th May 2022  

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Hospital Chain in South India

1,500 beds across 14 hospitals in Hyderabad, Bengaluru, Chennai, specialising in paediatric (70% revenue) and obstetrics (30%) care. With 1,160 beds as of 31.3.19, company clocked Rs. 543 cr in revenue in FY19, with EBITDA and PAT margin of 29% and 8% respectively. While bed capacity increased to 1,475 as of 31.3.21, covid-induced lower occupancy declined revenue to Rs. 650 cr in FY21, with PAT margin of 6%.

In 9MFY22, company bounced back with revenue of Rs. 761 cr, and EBITDA margin improving to 35%, on Rs. 270 cr EBITDA, while PAT stood at Rs. 126 cr (17% net margin), doubling EPS to Rs. 13, from FY20’s Rs. 6.

High Growth Visibility

FY20’s occupancy rates of 56% dropped to 34% in FY21, due to covid, but surged to 46% during 9MFY22 and can improve further. Company has added 340 beds in past 2.5 years which are yet to mature. Moreover, it plans to add 500 new beds over next 3 years (35% additional capacity), which can help replicate the historic revenue growth rate of +20% pa.

Attractive Margin

Average revenue per operating bed (ARPOB) of Rs. 46,000 per day is comparable to Apollo and nearly double of KIMS. Presence in quaternary and tertiary care, with 1/3rd beds or 473 of 1,500 total beds being intensive care units (ICU) leads to such higher realisation and a resultant best-in-class operating margin of 27% (14-20% for Narayana, HCG, Apollo, Shalby). Only KIMS has comparable margin, that too on higher capacity utilisation of ~65% over sub 50% for Rainbow.

Financial Discipline

Company has track record of uninterrupted dividend (of up to 20%) for past 10 years, despite capex on bed addition, and yet has surplus cash of Rs. 185 cr (31.12.21). With just Rs. 200 cr of equity raise and Rs. 50 cr in debt, company has increased bed capacity from 50 to 1,500 in past 20 years, implying 18% CAGR.

Reasonable Valuation

KIMS has been a ‘star’ hospital IPO of the past year and is Rainbow’s closest comparable peer based on business geography and margin profile. Rainbow’s bed capacity of 1,500 is exactly half of KIMS’ 3,000 beds, but some of the operational parameters are stronger – average length of stay (ALOS) of 3 days over KIMS’ 5 days as well higher average revenue per bed (ARPOB) of Rs. 45,000 per day over KIMS’ Rs. 25,000. While Rainbow’s occupancy lags KIMS’ 65%, it is likely to ramp up going forward. In this backdrop, Rainbow is being offered at exactly half of KIMS’ enterprise value (EV) of Rs. 10,400 cr, i.e. Rs.5,275 cr, making it fair.

Rainbow’s high growth visibility leads to FY23E PE of 30x, similar to KIMS, and lower than Apollo (48x) and Narayana (40x), making it reasonable for company’s fundamentals.