KIMS IPO: Why most analysts saying ‘subscribe with a long-term outlook’

The offer comprises fresh issue of Rs 200 crore worth of shares and an offer for sale (OFS) of up to 23,56,0358 crore shares, which would be sold in Rs the 815-825 price range. At the upper end of the price band, the issue is asking for a PE multiple of 31.2 times and EV/Ebitda of 17.8 times on an FY21 basis. Analysts largely have ‘subscribe with long term outlook’ rating on the issue.

They said the hospital chain has a good track record of retaining quality doctors, its debt-equity ratio is one of the lowest among peers while its return on capital employed of 24 per cent is comforting. Ebitda growth in FY21 was in fact best in the last three years, they said.

The company’s high dependence on its flagship Secunderabad hospital (at 33 per cent of revenues) is seen among the key risks. Besides, the forthcoming expansion plans in Bangalore and Chennai would require a lot of fresh capital and both are very competitive markets, analysts said.

“Valuations at the upper end of the IPO price band are slightly better than peers. The company has one of the best ROE & ROCE at 23.8 per cent and 24.8 per cent, respectively. It has a very healthy balance sheet with negative net debt-equity. We believe the expansion plan in Bangalore and Chennai can be funded through internal accruals and minimum debt,” said Yash Gupta of Angel Broking, who has a ‘subscribe’ rating on the issue.

The hospital chain said its revenues rose 20.4 per cent annually to Rs 1,329.2o crore, Ebitda 114 per cent annually to Rs 370.90 crore and PAT 105 per cent annually to Rs 205.50 crore over FY18-21.

“We expect KIMS to expand the network bed capacity to 3,800 (up 1,200 beds) by FY24 through a mix of brownfield and greenfield expansions while incurring a capex of Rs 815.8 crore. As a result, we expect overall revenue growth 15.8 per cent to Rs 2,067 crore, Ebitda growth of 12.9 per cent to Rs 534.30 crore, and PAT growth of 15.2 per cent to Rs.314.4 crore over the forecast period,” said Vinit Bolinkar, Head of Research at Ventura Securities.

In FY21, the company had an average revenue per operating bed (ARPOB) of Rs 20,609, a bed occupancy rate of 78.60 per cent, and an average of length of stay of 5.53 days. ARPOB at Tier 1 cities stood at Rs 39,571 while it was at Rs 11,187 in tier 2-3 cities.

For the year, 17.82 per cent of KIMs revenues came from cardiac sciences, 12.55 per cent from neurosciences, 9.30 per cent from renal sciences, 4.64 per cent from orthopaedics, 5.25 per cent from gastric sciences, 5.71 per cent from oncology and 6.11 per cent from mother & child care.

Ventura valued the stock at Rs 1,275 based on 17 times FY24 EV/Ebitda. This represents a potential upside of 55 per cent from the IPO price of Rs 825 per share over the next 24 months, it said.

Ajit Mishra, VP-Research at Religare Broking, said the domestic healthcare industry is expected to grow 17-18 per cent annually to Rs 7.1 lakh crore by FY24. This would be led by renewed impetus on Pradhan Mantri Jan Arogya Yojana (PMJAY). Also, changing demographics, increasing health awareness, medical tourism, health insurance coverage and rising income levels, he said.

“Further, 68 per cent of hospital treatments in terms of value were carried out by private hospitals in FY20 which is expected to increase to 72 per cent in FY24. All these factors bodes well for players like KIMS,” Mishra said and suggested a ‘subscribe’ rating on the issue.