Salient features of the IPO:
• Aster DM Healthcare Ltd. (Aster) is one of the largest private healthcare service providers, having operations in multiple GCC (Cooperation Council for the Arab States of the Gulf) states based on numbers of hospitals and clinics.
• The issue is a combination of fresh and OFS. The company will not receive any proceeds from the OFS. Net proceeds from the fresh issue would be around Rs. 6,750mn. Of the net proceeds, around Rs. 5,641.6mn, would be utilized to prepay and/or repayment of the debts availed by the company. Another, Rs. 1,103.1mn would be utilized for the purchase of medical equipment and rest for general corporate purposes.
Key competitive strengths:
• Long standing presence across GCC and India
• Diversified portfolio of service offerings
• Provision of high quality healthcare service
• Ability to attract and retain high quality medical professionals
• Ability to identify, adapt to and capitalize on market developments, conditions, trends and opportunities
Risk and concerns:
• Slow ramp-up of existing and new business
• Unfavorable patient volume and case mix
• Unfavorable regulatory changes
• Unexpected rise in employee cost
• GCC seasonality business
Valuation & recommendation: At the higher price band of Rs. 190 per share, Aster’s share is valued at a P/B multiple of 3.6x (to its restated FY17 BVPS of Rs. 52.7), which is at a discount to the peer average of 4x.
Below are few key observations of the issue:
• Aster operates in multiple segments of the healthcare industry, including hospitals, clinics and retail pharmacies and provides healthcare services to patients across economic segments through its various brands “Aster”, “Medcare” and “Access”
• As of 30th Sept. 2017, it had 323 operating facilities, including 19 hospitals with a total of 4,754 installed beds. In next 3-4 years, it is planning to commission around five hospitals each in GCC and India. Currently, Aster generates around 80% of the revenue from the GCC operations and rest from the India operations. Going forward, the company is anticipating an increased business potential in India and thus is expecting around one third of the business from India.
• The Union Budget 2018 was historic for the healthcare industry. The government has proposed to launch world’s largest government funded healthcare program i.e. National Healthcare protection scheme, by which beneficiaries are anticipated to be around 500mn. We feel that this will be beneficial for the sector in long run. Anticipating the future business potential post the announcement in the budget, Aster is looking to alter its current business plan of mainly focusing on Tier I cities. The company feels that there is a serious case to venture in the tier II & III cities and towns as post the budget announcement the affordability of the medical services would improve.
• Earlier, the Sanad hospital in the Saudi Arabia generated maximum revenue from the government. However due to fall in the crude prices in the last 2-3years, Aster in consultation with the Saudi government has taken a haircut on the receivables. In FY16 and FY17, the company has made a provision of around Rs. 5bn for the same. In the pre-IPO meet, the management has guided that, it is confident of getting the payments from the government. Thus any write back of the provision would be positive for the company
• The GCC business is seasonal in nature. H1 of the fiscal year is a lean period for the company and it generates around 45% of the annual top-line and 25-27% of the annual EBITDA during this period. In H1 FY18, Aster reported a net loss of Rs. 764.3mn on a top-line of Rs. 31,225.9mn. Based on our quick estimate, we are anticipating a top-line of Rs. 70,192.5mn and EBITDA of Rs. 5,764.1mn in FY18E. EBITDA and PAT margin is expected at 8.2% and 0.5%, respectively.
• On P/BV valuation, the demanded valuation by Aster is at discount to its peers in the domestic and GCC market. However, considering the short financial history with volatility in the performance, future growth strategy of the company and bright outlook of the healthcare sector, we assign a “SUBSCRIBE” rating for the issue.
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