Rainbow Children's Medicare is a multi-speciality paediatric, obstetrics and gynaecology hospital chain in India. It offers a wide array of services such as newborn and paediatric intensive care, paediatric multi-speciality services, obstetrics and gynaecology, multidisciplinary foetal care, perinatal genetic and fertility care.
Having started its first paediatric speciality hospital in Hyderabad in 1999, the company currently operates 14 hospitals and three clinics in six cities, with a total bed capacity of 1,500 as of 30 September 2021. Going forward, it may seek to expand the hospital network through acquisition or development of assets.
Rainbow will float its Rs 1,581 crore initial public offering (IPO) on April 27 and close it on April 29. The anchor book portion had opened for a day on April 26.
About the IPO
The company intends to garner Rs 1,581 crore through the issue at the upper end of the price band. The IPO comprises a fresh issue of shares aggregating to Rs 280 crore and an offer-for-sale (OFS) of up to 2.4 crore shares by promoters and investors.
The price band has been fixed at Rs 516 to Rs 542 per share.
Of the net fresh issue proceeds, Rainbow will spend Rs 40 crore to redeem its non-convertible debentures (NCDs), and Rs 170 crore to set up hospitals and purchase medical equipment. The OFS money will go to the selling shareholders.
Features of Rainbow Children's Medicare Limited IPO
Brokerage calls
Most experts are positive about the prospects of the company and advise investors to ‘subscribe’ to the issue.
According to a report from ICICI Direct Research, the key triggers for the company are the large underpenetrated addressable children centric hospitals market; comprehensive perinatal care provider, with synergies between paediatric and perinatal services; and its hub and spoke model that provides synergies and ensures better care and access for patients.
“The target market is expected to grow at a compound annual rate of 14 percent till FY26. However, the key for Rainbow would be sustained growth amid increased consolidation in the healthcare space,” ICICI Direct said.
However, there are certain inherent risks to the business as the company depends on its ability to attract and retain medical professionals.
ICICI Direct assigns a ‘subscribe’ rating to the issue given the unique business model and decent valuations. “At the upper end of the price band, it is valued at 36.4x EV/EBITDA for FY21 and 22.9x EV/EBITDA for nine months of FY22.”
Marwadi Financial Services highlights that key business strategies are to strengthen tertiary and quaternary paediatric services and grow presence through hub and spoke networks across key geographic clusters and new locations, among others.
Key risks arise from the fact that the firm operates in a regulated industry, and compliance with safety, health, environmental, labour and other regulations, or failure to obtain or renew approvals, licences, registrations and permits, may affect the business.
“Considering the trailing twelve months (December 2021) earnings per share or EPS of Rs 12.56 on a post issue basis, the company is going to list at a price to earnings of 43.16x with a market value of Rs 5,501 crore whereas peers Apollo Hospital Enterprise and Fortis Healthcare are trading at PEs of 77.3x and 56.9x respectively,” Marwadi Financial Serviecs said assigning a ‘subscribe’ rating for this IPO as it is available at a reasonable valuation compared to peers.
The profitability for nine months ended 31 December 2021 increased substantially to Rs 126.41 crore from Rs 38.53 crore in the same period last fiscal. Santosh Meena, head of research at Swastika Investmart, said: “There might be a possibility that this spurt in profitability was due to COVID second wave of hospitalisations in the first quarter of FY22 which we believe might not continue.” He, however, believes that the issue is “good for long term investors” given the specialised nature of the business, experienced management team, proven ability to attract, train and retain high-calibre medical professionals and under-penetration of hospitals in India.
According to Yash Gupta, equity research analyst at Angel One, it will be challenging to maintain EBITDA margins as the company plans to increase beds by 500 in four to five years. The average revenue per operating bed has increased 57 percent in the last two years but it will be difficult to increase it from these levels and this will create pressure on EBITDA margins.
He adds, “The revenue and return ratios have improved significantly in first nine months of FY22 and we don’t expect the company to maintain this growth in the near future.”
Based on nine month FY22 numbers, Gupta suggests that the IPO is priced at a PE of 30.4 times and EV/EBITDA of 13.8 times at the upper end of the price band which is in line with the listed peer group: “Given the expensive valuation, we are assigning a neutral recommendation for the IPO.”
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