Leading brokerages have given ‘subscribe’ rating to the IPO of Krishna Institute of Medical Sciences Limited (KIMS), which operates 9 multi-speciality hospitals under the ‘KIMS Hospitals’ brand name, with an aggregated bed capacity of 3,064 bed.
According to analysts, with planned capex of 1000 beds, industry leading occupancy rates of nearly 80 per cent, growth in revenues and margins, spearheaded by Dr. Bhaskara Rao Bollineni, a renowned cardiothoracic surgeon and finally being available at reasonable valuations makes the IPO an interesting investment opportunity. KIMS is an affordable quality care across Tier I and TierII/III cities with ~20-30% lower prices compared to other private hospitals in South India.
The company’s flagship hospital at Secunderabad is one of the largest private hospitals in India at a single location with a capacity of 1,000 beds. KIMS has significantly expanded its network through acquisition of hospitals in the recent years with 33% of bed capacity has been installed in the last four years. On company’s expansion, Canara Bank Securities is of the view that the company has created good space for themselves in AP and Telangana and are the fastest growing hospital in terms of revenue of past 4 years with low operating cost model.
The Indian healthcare delivery system has seen consolidation in recent years. A highly competitive industry, coupled with tightening of healthcare regulations, has made it difficult for smaller players in the industry to stay profitable said Canara Bank Securities sharing its view on the industry expansion trend.
Another brokerage firm Sharekhan is of the view that consolidation of hospital brands in India’s Tier 2-3 cities provide a base for further expansion and consolidation and this is accompanied by expansion plans to enter the markets of Chennai and Bengaluru. The company’s leading position in Andhra Pradesh and Telangana as a provider of quality and affordable healthcare services, as well as track record of growth, makes it well-positioned to be a consolidator in the region. This could be complemented by the company’s efforts to improve operational efficiencies according to Sharekhan In FY21, KIMS’s ARPOB (Average Revenue Per Occupied bed) was Rs 20,609 (Rs 39,571 for hospitals in Tier I and Rs11,187 for TierII/III hospitals).
KIMS offers a comprehensive range of healthcare services across over 25 specialities and super specialities. Revenue is diversified across specialities include 17.8% from cardiac sciences, 12.6% from neuro sciences, 9.3% from renal sciences, 4.6% from orthopaedics, 5.3% from gastric sciences, 5.7% from oncology, 6.1% from mother & child care among others. Top 10 doctors contributed 22% and top 25 doctors at 36% of total income. At higher price band of Rs 825, the issue is valued at P/E of 32.1x (on FY21 post issue EPS of Rs25.7).
KIMS reported 20% CAGR in operating revenue during FY19-FY21 as compared to flat or single digit growth in peers while profitability also remained strong with NPM at 15.5%. The company strategized to increase out-patient volume and reduce ALOS to boost profitability going forward.
Considering the financial performance, KIMS reported strong performance in top line and bottom line, way above the industry trend, says Choice Broking its report. Return ratios (RoE/RoA at 19.3%/12.6% post issue) are driven by strong growth and margin performance. EBIDTA margin stood at 27.9% in FY21 v/s industry average of ~16%. “We view sustaining margin at these levels (way above industry trend) would remain challenging task. Further, business is skewed towards particular region AP and Telangana which may restrict KIMS to leverages the growth opportunities from overall development of domestic healthcare sector,” the report said.
EPS improved to Rs25.7 in FY21 from Rs14.4 in FY20 mainly driven by strong margin performance. Business growth & return ratios maintained at healthy level but sustainability remains challenging,” says Choice Broking in its report. “Considering all these parameters, we assign ‘Subscribe with Caution’ rating to issue,” it said.
Outlook of healthcare sector remains buoyant given the ongoing pandemic and likely increase in spending due to health cautiousness. As per the Crisil report, India’s healthcare sector is expected to grow at a CAGR of 17- 18% during 2020-24. On healthcare industry, the Indian healthcare industry is expected to log a CAGR of 17-18% and Rs. 7.1 trillion by FY24 according to Religare Securities. This would be led by renewed impetus on Pradhan Mantri Jan Arogya Yojana (PMJAY). Also, changing demographics, increasing health awareness, medical tourism, and health insurance coverage and rising income levels would be key drivers of growth for the healthcare industry. Further, 68% of hospital treatments in terms of value were carried out by private hospitals in FY20 which is
expected to increase to 72% in FY24, it added. It is of the view that all these factors bodes well for players like KIMS Hospitals.
Other than advantage of regional dominance, ICICI Direct believes that the company has demonstrated one of the best financial performances among peers. It also has almost net debt free balance sheet, healthy FCF in FY21 despite operating in an asset heavy industry. KIMS’ ability to turn around acquired assets also seems one of the best in industry. Ventura Capital while recommending a SUBSCRIBE for long term investing rating said “we expect KIMS to expand the network bed capacity to 3,800 (+1,200 beds) by FY24 through a mix of brownfield and greenfield expansions while incurring a capex of Rs. ~815.8 cr. As a result, we expect overall revenues / EBITDA / PAT to grow at a CAGR of 15.8% / 12.9% / 15.2% to Rs. 2,067.1 cr / Rs.534.3 cr / Rs.314.4 cr, respectively, over the forecast period.” It expect a marginal 1% growth in ARPOB, while occupancies are expected to climb to 80.2%.
According to Ventura report, considering the gestation period required to reach optimum utilization, EBITDA and net margins are expected to decline by 250 bps and 50 bps to 25.8% and 15.2%, respectively, over the forecast period. “We value the stock at Rs. 1,275 (17x FY24 EV/EBITDA). This represents a potential upside of 55% from the IPO price of Rs. 825 per share (upper band) over the next 24 months. We recommend a SUBSCRIBE for long term investing,” Ventura said in its report.
On listing gains, Sharekhan considering company’s efforts to improve operational efficiencies is of the view that given the established brand in the hospitals space in Telangana and Andhra Pradesh states, driven by clinical excellence and affordable treatment options, sizeable bed capacity and plans to expand presence in the adjoining states and initiatives to improve operational efficiencies, would be the key positives. KIMS has reported a healthy topline and earnings growth of 18.5% and 78.6% for FY2021 and has strong return ratios of 23.3% which bodes well for the company. At the IPO price band of Rs. 815-825, the offer is priced at 30.9x / 31.3x it’s FY2021 EPS (at its lower / upper price band).
It has therefore assign ‘Subscribe’ rating for listing gain. Overall majority of brokerage house have positive view on the issue from a long term
perspective. The company has already raised Rs 955.68 crore from anchor investors ahead of its initial share-sale yesterday.