IPO Snapshot: 

Shalby Limited has entered the primary market on Tuesday 5th December 2017, to raise up to Rs. 480 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale of upto 10 lakh equity shares by promoter Dr. Vikram Shah, both in the price band of Rs. 245 to Rs. 248 per share. Representing 18.85% of the post issue paid-up capital, issue will raise Rs. 505 crore at the upper price band, and will close on Thursday 7th December. Listing is likely on 15th December.

Company Overview:

Shalby Limited, promoted by orthopedic surgeon Dr. Vikram Shah, is an Ahmedabad head quartered tertiary care multi-specialty hospital chain, operating 11 hospitals aggregating 2,012 beds, of which, 9 hospitals are operational with 841 beds (as of 30-6-17). Most of its hospitals are located in tier 2/3 towns such as Ahmedabad, Vapi, Jabalpur, Indore, Mohali, Jaipur and Surat, with only 1 in Mumbai, having commenced operations in Jan 2017. Its two Ahmedabad hospitals accounted for 41% of in-patient volume and 68% of total revenues in Q1FY18. This share is likely to reduce as Jaipur, Surat and one Ahmedabad hospitals are also new having commenced operations after March 2017. Company’s expansion strategy is also centered on establishing presence in Tier II Cities such as Nashik and Vadodara.

In addition, it has 47 out patient clinics (of which 5 in Africa) and 10 shared surgery centres within 3rd party hospitals (of which 2 in UAE and 1 in Africa). With orthopaedics accounting for 2/3rd of its Rs. 325 crore revenue of FY17, it commands 15% market share of all joint replacement surgeries conducted by private corporate hospitals in India in 2016.

Financial Performance:

While operational beds has risen by 20% CAGR between FY13-17, revenue growth was lower at 10% but EBITDA posted 15% CAGR during the 4 year period and PBT 30% CAGR. However, profits have been fluctuating – EBITDA of Rs. 70 crore in FY15 dropped to Rs. 58 crore in FY16 and then rose to Rs. 80 crore in FY17. AT PBT level too, from FY14 peak of Rs. 52 crore, PBT contracted to Rs 43 crore in FY15, then further down to Rs. 36 crore in FY16, before spurting to Rs. 53 crore in FY17. Thus, FY17 PBT remained at similar levels clocked 3 years ago, despite 26% revenue jump from Rs. 260 crore in FY14 to Rs. 325 crore in FY17.

FY17 EBITDA margin expanded to 25% from 20% YoY, leading to an EBITDA of Rs. 80 crore. PBT and PAT for FY17 stood at Rs. 53 crore and Rs. 63 crore respectively, due to MAT credit entitlement. Q1FY18 revenue stood at Rs. 89 crore, while EBITDA margin expanded further to 30%, on EBITDA of Rs.27 crore. June quarter PBT and PAT were at Rs. 19 crore and Rs. 14 crore respectively, leading to an EPS of Rs. 1.63 for Q1FY18 and Rs. 7.16 for FY17.

As of 30-6-17, consolidated net worth stood at Rs. 289 crore, translating into BVPS of Rs. 33.While current debt equity ratio is quite high at 1.15:1, it will cool down post IPO, as Rs. 300 crore debt repayment from issue proceeds will trim debt to only Rs. 45 crore, from current Rs. 345 crore. 

Company has undertook rapid expansion which will yield results over the medium term, as scale up to full capacity takes a few years. Total bed capacity, as on 31-3-15, was 907, while operational beds on 30-6-17 were at 841, although one hospital was shut down in the interim. However, its current bed occupancy rates are quite low at 34% (versus 50-70% for peers), which have dropped from 49% in FY13 and 41% in FY15, in turn leading to lower avg RoCE of 11-13% for FY17 and FY16 respectively, from 35% in FY14. Gradual scale-up, low bed occupancy and fluctuating profits mar the current profitability of the company.

Shareholding and Objects of Issue:

Current promoter holding of 97.86% will shrink to 79.40% post IPO. Company’s balance shareholders include employees and company trust. 

Objects of the Rs. 480 crore fresh issue comprises (i) loan repayment Rs 300 crore, (ii) purchasing medical equipment for existing hospitals Rs. 64 crore, (iii) Rs 11 crore for purchasing furniture for new hospitals.  

Valuation and Peer Comparison:

At Rs. 248 per share, company will command a market cap of Rs.2,679 crore and enterprise value of Rs. 2,710 crore. Based on expected FY18 earnings, EV/EBITDA multiple comes to 26 times while PE multiple is 36x, on current year estimates.

Comparison with other listed Indian hospitals chains shows that Shalby enjoys the highest margins along with very healthy return ratios, and is still commanding the lowest PE multiple, although the EV/EBITDA multiple is on the higher side. India’s largest private sector hospital network Apollo Hospitals, with capacity of ~10,000 beds at 64 hospitals and Rs. 6,400 crore annual topline is ruling far expensive, so are Narayana Hrudayalaya and Healthcare Global specializing in cardiology and oncology respectively. Fortis Healthcare facing governance issues is not a good fit for benchmarking purposes.

However, hospital chains are not in the flavour on the bourses as financials have been jeopardized due to steep pricing caps imposed by the state. Moreover,

(A) Tepid primary market returns – stock of Narayana has delivered only 18% return in 2 years from its listing,

(B) Thin trading volumes - 3 month median traded volumes of 30,000 shares versus free float of 6.5 crore equity shares of Healthcare Global and

(C) Dismal secondary market performance – Apollo Hospitals has corrected by 11% in the past 3 months, against 10% gains for BSE Sensex, depict poor fancy for hospital stocks currently. Thus macros are not truly supportive of the sector at present.  

Conclusion:

While the company seems to be built on a strong foundation, it is yet to reap the fruit of its labour, as new hospitals mature over the next 2-3 years. No doubt it is better among the lot and valuation is also not too aggressive, but immediate upside may be limited. Over the longer term, the stock can be better rewarding.

Disclosure: No interest.