Shalby Hospitals: High debt levels, aggressive pricing offers little comfort

Ruchi AgrawalMoneycontrol Research

The IPO of Shalby Hospitals offers an opportunity to invest in a multi-specialty hospital chain in the growing healthcare segment. The orthopedic focused hospital chain comes across as a decently managed company which would benefit from industry expansion and increasing healthcare penetration in the long run. However, we believe the issue price leaves little on the table for the investors limiting any near term upside.

The company

Incorporated in 2004, Shalby is a multi-specialty chain of hospitals in India led by Dr Vikram Shah, an Orthopedic Surgeon with more than 25 years of professional experience. Focused majorly on tertiary care, their hospitals also offer quaternary healthcare services to patients in various areas of critical specializations.

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IPO details

Shalby’s issue comprises a fresh issue of up to Rs 480 crore and an offer for sale by Dr Vikram Shah for around Rs 24.8 crore. In the price band of Rs 245 - Rs 248 per share, the total issue size approximates to Rs 504.8 crore. The issue would reduce the promoter’s stake in the company by approximately 18 percent.

Business overview

Shalby provides inpatient and outpatient healthcare services through 11 operational hospitals with an aggregate bed capacity of 2,012. As on June 30, 2017, they had 9 operational hospitals with an aggregate operational bed count of 841. As per an F&S report, the company has a 15 percent market share in all joint replacement surgeries conducted by private corporate hospitals in India in 2016.

What we like about Shalby        

Benefits from growing healthcare sector: Considering the underpenetrated nature of healthcare in India, Shalby looks nicely positioned to benefit from the growth in future demand. Moreover, with increased sedentary lifestyle, orthopedic and joint replacement have shown strong growth.

Focusing on Tier-I and Tier-II cities - The company’s strategy of steering clear of metropolitan markets and focusing on smaller cities helps in controlling costs along with finding adequately skilled manpower.

Asset light model – in a quest to control and manage costs, the company has grown by adopting a leased and managed model. This enabled the business to expand rapidly and reduced locking up of capital.

Quick breakeven – The hospitals have turned EBITDA positive within a span of two years and the management looks to reduce this to one year for the upcoming hospitals with active focus on cost control along with marketing and expansion of allied services.

What makes us cautious on the IPO

Highly leveraged balance sheet - With rapid expansion the company has accumulated heavy debt on the balance sheets. Even post the IPO, the debt to equity will not fall substantially. The leverage limits the potential for rapid expansion in the future.

Excessive reliance on one promoter – Although professionally managed, the company has a family operated business model and extensive reliance on Dr Vikram Shah. This exposes the company to risks arising from non-performance or non-availability of one individual.

High concentration in few hospitals and regions – Major investment and revenues of the company are derived from two hospitals and the western Indian region with Ahmedabad accounting for a vast majority of bed capacity.

High dependency on one field - Orthopedics forms more than 2/3rd portion of revenue. Any change in government policies that relate to patients covered by government schemes and regulations for capping of costs exposes the company to risks.

Peer analysis and valuation

In terms of growth performance Shalby clearly has grown at a slower pace compared to most of its listed peers.

At the higher price band of Rs 248, Shalby is priced at a PE of 35x trailing earnings which seems at a discount to most of the peers with a superior EBITDA margin at 22 percent.

However, given the high leverage, the EV/EBITDA stands at 36.7x which is considerably above the average peer multiple of 23x. The debt equity ratio of more than double the average of listed peers is also a point for caution and suppresses the return ratios.

Given the slightly stretched valuation of the issue, we do not expect near-term upside for the IPO investors. Invest only if you have a very long-term investment horizon.

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