IPO Size: Rs. 2,107 cr, Entirely Offer for Sale (OFS)

• By private-equity promoter EQT Private Capital (97% holding to fall to 83% post IPO)

Price band: Rs. 28-30 per share

• On 31.10.24, company raised Rs. 366 cr via pre-IPO placement at Rs. 30 per share

M cap: Rs. 14,410 cr, implying 15% dilution

IPO Date: Tue 5^th Nov to Thu 7^th Nov 2024, Listing Tue 12^th Nov 2024

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

Servicing US Healthcare Industry

Sagility is a 24 year old business serving US healthcare industry, mainly health insurance companies, proving claims management and payment integrity services. The company was carved out of Hinduja Global’s healthcare business in Jan 2022 and enjoys a 1.23% market share of US healthcare operations outsourcing market. However, attrition of over 25% has historically remained high and is concerning.

Promoter Shares Pledged

Shares of promoter Sagility BV are pledged to finance the leveraged buy-out. Promoter-level debt is not viewed positively and may adverse impact company valuations, due to factors beyond its control. Moreover, company too has availed loan for leveraged buy-outs, with its credit rating of BBB- (in Aug 2023) being the lowest ‘investment grade’ rating. In Oct 2024, rating moved one notch higher to BBB, still being impacted by promoter level debt.   

High Margin but Low Return

FY24 revenue rose 13% YoY to Rs. 4,753 cr, with adjusted PAT (adjusted for intangible amortization and ESOP cost) at Rs. 590 cr, translating into 12% adjusted net margin. However, high cost of acquisition keeps denominator large and hence RoE is barely 9%, on adjusted PAT.

Company provides tech-enabled services which is supposed to be asset light, but Rs. 7,600 cr networth is eaten up by Rs. 5,600 cr goodwill and Rs. 1,900 cr intangible assets. Thus, despite double-digit profitability, return on equity is an unencouraging single digit. In other words, company earning healthy profits may not translate into similar return for its shareholders.

No Growth in Q1FY25 Performance

Q1FY25 revenue rose 10% YoY but adjusted PAT was flat at Rs. 145 cr, leading to adjusted EPS of 30 paisa. Going forward, amortization on intangibles will decline from Rs 320 cr to Rs 130 cr, but FY24 effective tax rate of 6% will normalize to 24-25%. Thus, taking FY24 adjusted EPS of Rs. 1.23 for valuation purpose, shares are being offered at a PE multiple of 24x, making it fully priced. RoE of single digit may not expand much in the future.