IPO watch: Shalby Hospitals a good offer for investors with high risk appetite

ET Intelligence group: Investors with an appetite for higher risk may subscribe to the initial public offering ( IPO) of Shalby Hospitals, which runs a chain of hospitals in western and central India, because of its superior margins compared with the industry. Also, its earnings are likely to increase as occupancy at new hospitals improves.

The company’s asking valuation at the upper range of the price band stands at 18 times EV/EBITDA based on the next fiscal’s projected earnings, which is higher than the industry average of 17.3 times. The company’s valuation can sustain this if it continues to deliver on its historical superior margins and capital efficiency parameters.

Also Read | Shalby IPO kicks off: Here's how it stacks up against peers

The hospital sector has not been rewarding for investors for the past one year due to government’s intervention to cap prices of certain implants, which has been an overhang on hospital stocks, and investors have been wary of increasing their exposure to the sector.



BUSINESS MODEL
Shalby Hospitals has 11 hospitals with a significant presence in Gujarat, and is expanding to cities such as Indore, Jaipur, and Mumbai. It runs hospitals on the basis of fully-owned/leased for 30 years, on a revenue-sharing basis. In the last fiscal, hospitals in Gujarat accounted for 80 per cent of the revenues. The company earns nearly 60 per cent from orthopedic patients, and has a 15 per cent market share in orthopaedic procedures in private corporates hospitals. However, the share of revenues from orthopedic patients is reducing.

FINANCIALS
Revenue grew at 9.6 per cent a year to Rs 325 crore between FY13 and FY17, while the operating profit (EBITDA) rose 14.6 per cent a year to Rs 79.5 crore in the same period. The operating margins remain the range of 19-25 per cent. The return on equity (RoE) stood at 22 per cent in the last fiscal, while its peers’ has been in low single digits. The orthopaedic and non-orthopaedic volume grew 6.6 per cent and 24.3 per cent a year between FY13 and FY17.

STRENGTH
The company has mainatained higher margins and RoE than its peers because of several cost-efficiency measures, such as procurement of medical consumables, lower capital expenditure per bed, higher beds to operation theatre, and better space utilisation.

The procurement of medical consumables, in proportion to sales, dropped to 20.5 per cent in FY17 against 29.1 per cent in FY13. The oldest hospital at Ahmedabad (SG Shalby) has an EBITDA margin of 42 per cent. The company’s hospitals turn break-even at an occupancy rate of 28 per cent, compared with the industry average of 40 per cent. Its new hospitals in Naroda, Surat, Jaipur will start reflecting the financials from the current fiscal.

RISK FACTORS
The company is expanding to new cities where the average revenue per bed may be lower. The company relies heavily on two hospitals: in FY17, SG Shalby and Krishna Shalby contributed 77 per cent to the total revenues. The government has capped prices of several implants, and if it is extended to more services, the hospital’s margins may take a hit.