Fireworks are happening in the stock market as well, with the Nifty 50 reclaiming the coveted 18,000-mark post-Diwali after a month-long low drift. It’s a bustling week for IPOs as well. Two IPOs have already gone live and two more are due to open for subscription on November 3. One such offer is that of Global Health, which operates hospitals and clinics under the brand name ‘Medanta’.

The topline of healthcare companies, particularly hospitals, has been trending higher ever since Q1FY22. Average revenue per bed is seeing a healthy rise backed by price hikes and change in payer mix towards insured people. The industry has outperformed the Nifty 50 index by over nine percentage points in the past quarter. 

Coming to the IPO-bound company, Medanta Hospitals is a multi-speciality tertiary healthcare provider, founded by cardiac surgeon Dr Naresh Trehan in 2009. Tertiary care hospitals provide advanced healthcare services like complex surgeries on a referral from primary or secondary medical care providers. 

The company’s flagship hospital is located in Gurgaon and it has four more hospitals located in Indore, Ranchi, Patna and Lucknow. Another 500-bed hospital is also under construction in Noida. Global Health also operates a network of six multi-speciality clinics in Delhi NCR. 

Carlyle Group exits as a shareholder  

Global Health is coming out with an IPO size of Rs 2,205 crore, out of which just Rs 500 crore is a fresh issue of shares. The remaining is an offer for sale by its existing shareholders, namely Anant Investments (part of Carlyle Group) and Sunil Sachdeva. 

Notably, Anant Investments had entered into three share-purchase agreements prior to this IPO. This will involve a combined stake sale of 5.66% to RJ Corp, SBI Mutual Fund and Novo Holdings. This investor will sell the remaining stake of 20% in the upcoming IPO, making 2.3X returns on this deal. The other shareholder, Sunil Sachdeva, will be selling only 0.4% stake in the IPO. Hence, the offer for sale is mainly to give Carlyle Group its exit. 

An important risk factor is that about 75 lakh shares held by Sunil Sachdeva, representing roughly 3% stake in the company, are pledged as security for loans taken from IIFL Wealth Prime. 

Coming to the fresh issue part, Global Health will retire a debt portion of Rs 375 crore out of the proceeds of Rs 500 crore. The overall outstanding debt of the company was Rs 842.3 crore at the end of June 2022. Out of this, Rs 677 crore was owed to banks by two of its subsidiaries which operate the Lucknow and Patna facilities. The stated amount will go towards reducing the debt burden of these subsidiaries. The total debt to equity ratio of the company was comfortable at 0.5X at the end of Q1FY23. 

A diversified healthcare player which posted healthy growth in past two years

According to its red herring prospectus, Global Health is a formidable healthcare player in the northern and eastern regions of India. Its revenue base is also well diversified across specialties like cardiology, neurosciences, orthopedics, urology, oncology and gastroenterology etc. However, cardiology, the mainstay of Medanta’s promoter, remains the single largest contributor to the overall revenue pie.

Medanta’s revenues grew at a CAGR of 20% in the past two years, reaching Rs 2,167 crore in FY22. On the other hand, the healthcare services industry grew at a CAGR of 12% between FY17 and FY22. The company suffered a fall in revenues in FY21 owing to lower elective surgeries during the Covid-19 pandemic and fall in medical tourism. 

However, Medanta’s revenues rebounded strongly in FY22 on normalisation of business operations, with occupancies crossing the 60%-mark and average revenue per occupied bed rising by 14% YoY. The occupancy rates were buoyed by in-patient volumes rising 22% over the pre-pandemic period. 

The company’s network is still developing, and it derived over 80% of its FY22 revenue from its three mature hospitals at Gurgaon, Ranchi and Indore. The hospitals at Patna and Lucknow are still in the ‘developing’ phase with the Patna one clocking net losses as of now. The hospital at Lucknow started posting profits only in FY22. 

If we compare its two-year growth trajectory with peers, Medanta sits somewhere in the middle rung. Max Healthcare has grown the fastest among small and mid-cap private healthcare chains. Although KIMS, which got listed in 2021, has grown only slightly faster than this IPO-bound player, it boasts of higher capital returns and asset utilisation.

The return on equity generated by KIMS was at 24% in FY22, twice as high as Medanta’s figure. Higher net profit margins and better asset turnover give an extra edge to this south-based healthcare player, according to the principles of Dupont. In comparison, Medanta’s performance on this front is mediocre at best. 

The company has some serious catching-up to do in sweating its mature healthcare units and scaling-up its newer units. Building a solid reputation and brand are key here. This should eventually lead to higher occupancies and the benefit of operating leverage will kick-in, enhancing the margins and asset turnover in process. But it's easier said than done. 

Medanta has an ambitious expansion plan, but it comes with risks 

Credit rating agency CRISIL expects the healthcare delivery sector in India to grow at a four-year CAGR of 13-15% to reach Rs 8.3 lakh crore by FY26. The demand will be driven by government support through Pradhan Mantri Ayushman Bharat Yojana, an increase in lifestyle-related ailments, rising per-capita income levels, a growing elderly population and revival in medical tourism. 

Accordingly, mid- and small-cap hospitals have drawn up ambitious expansion plans for the medium-term and are also looking towards the inorganic route for growth. Max Healthcare, KIMS and Medanta aim to expand their bed capacity by over 40% in the next three years. Oncology-centric Healthcare Global is looking to undertake acquisitions in the same space. 

Medanta aims to reach the capacity of 3,500 beds by FY25. Facilities in Patna, Lucknow and Noida will enable the company to achieve this milestone. However, investors should note that such expansion plans come with a set of risks. 

When you build a new hospital (Noida), it puts pressure on margins in the form of higher depreciation and interest costs, which ultimately depresses capital returns. New units may also take 3-4 years to break-even, according to Narayana Hrudayalaya’s management.

Even when a company adds beds to an existing facility (Patna and Lucknow), around Rs 1.3-1.5 crore investment is required for each additional bed. Medanta does not offer great comfort as far as its current net margins and returns are concerned. KIMS is much better equipped to undertake such an expansion. 

Coming to Global Health’s PE valuations, the company does look attractively valued vis-à-vis large- and mid-cap healthcare players. However, it is pricier than KIMS, which is a 22-year-old brand and has much better fundamentals. Even a large and established player like Narayana is available at reasonable valuations. 

Medanta is a relatively new healthcare brand which is trying to find its feet in this sunshine sector. Long-term investors should ideally wait and see if the company is successful in scaling-up its developing units and setting up its new facility. 

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation