Narayana Hrudayalaya IPO opens: Expensive but subscribe

"The company runs its business on an asset right model, based on engaging with partners that invest in and own the fixed assets, primarily land and building while it invests and owns the medical equipment. It operates and manages the hospital, typically on a revenue share basis, with or without a minimum revenue guarantee given to its partners," it says in a note.

According to the brokerage, another reason to be positive about the sector is low demand-supply mismatch with a combination of macroeconomic factors (changing demographics, increasing affluence of the Indian population, greater health awareness, rising incomes, changes in the disease profile and rising penetration of health insurance) is likely to lead to an increase in demand for quality healthcare services.

Aditya Birla Money also recommends to subscribe the IPO for long term investors terming it 'one of its kind opportunity'. However, it adds current valuation leaves little room for short term investors to play for listing gains. The brokerage states that given experienced management team with a strong execution track record, reputed brand for clinical excellence and ability to attract high quality doctors, Narayana is well-positioned to capture market opportunities and to benefit from the expected growth in the healthcare services market in India.

"Narayana uses 'asset right' approach for expansion of their hospitals. It operates through a combination of models such as own and operate, revenue sharing, lease/rental basis and managed hospitals. The effective capital cost per bed of Rs 25.5 lakh as of March 31, 2015 which is much lower compared to a fully own and operate model," it says.

However, there are few concerns that Aditya Birla Money has raised. It says that Narayana's plans to add 623 beds across two locations over the next 24 months exposes it to execution risks such as time and cost overruns. Also, it is heavily dependent on three key hospital to continue to generate higher revenues, which contribute around 58 percent the total revenues.

Its sales have grown at a CAGR of 30 percentwhile EBITDA has grown by a CAGR of 23 percent during FY11-FY15.

Narayana is involved in certain legal proceedings which are pending at different levels of adjudication which may materially affect business, financial condition, reputation and future prospects.

Hem Securities, however, is not impressed by the issue, recommending investors to avoid it. Hem Securities finds the IPO expensive at current levels though business model looks attractive. It points out that certain facilities from which company operate do not possess occupancy certificates or prior environmental clearance.Analysts SP Tulsian also agrees that the issue can be avoided on On pure fundamental grounds due to lower size, smaller topline and poor margins of Narayana. He says Apollo Hospital looks like a much stronger player with more attractive price.

The company operates 31 hospitals and 24 primary care facilities across India,  with 5442 operational beds and the potential to reach a capacity of up to 6,602 beds. In FY15, its facilities have provided care to over 19.7 lakh patients. In FY15, it generated 90.7 percent of total revenues from 19 hospitals offering multispecialty and super specialty services, 7.3 percent from heart centres and the remaining from the management fee received from four managed hospitals, ancillary businesses and other standalone clinics and primary care facilities.

In FY15 it incurred a net loss of Rs 10.86 crore due to operations in Cayman Island and a revenue of Rs 1371.5 crore. Growth picked up pace in first half of FY16 as net profit stood at Rs 12.5 crore on a revenue of Rs 788.56 crore and margins at 11.7 percent. It has cash of Rs 44 crore. As of September 2015, its has a net debt of Rs 294 crore.Follow @NasrinzStory