Shalby Hospitals IPO: Good health at a cost

Ahmedabad-based multispeciality hospitality chain, Shalby Ltd, that is launching its initial public offering (IPO), has a few things going for it — leadership in orthopaedic care, capabilities in other specialties, expansions, strong brand and market potential. These factors should mean good revenue and profit growth for the company in the coming years.

On the flip side, the company’s profits over the past few years have been volatile — attributed to the setting up of new hospitals and tax adjustments. Also, the asking price for the issue is not cheap. At the upper end of the price band (₹248), the price-to-earnings ratio based on the FY-17 earnings per share on the expanded equity base is about 44 times.

This is seemingly attractive compared with the valuation of bigger peers such as Apollo Hospitals (70 times), Narayana Hrudayalaya (72 times) and Healthcare Global Enterprises (114 times).

But that’s because Shalby’s earnings jumped sharply (66 per cent y-o-y) in FY-17, aided in a big way by a large minimum alternate tax (MAT) credit entitlement. Excluding this, Shalby’s valuation would be in the range of its peers. That said, after a subdued show in FY-15 and FY-16 attributed to the commissioning of new hospitals, Shalby’s operating profit and margin perked up in FY-17.

The benefits of the expansion over the past few years should continue accruing in the coming years. Further expansion plans should help too in the long run. Investors with a high-risk appetite and long-term perspective can consider subscribing to the offer. The issue comprises offer-for-sale of 10 lakh shares (worth about ₹25 crore) by promoter Dr Vikram Shah and fresh issue of ₹480 crore. A chunk of the proceeds from the fresh issue will be used primarily for repayment of loans (₹300 crore); this will reduce the debt of the company significantly, cut interest cost and aid profit growth. Efforts towards improving operational efficiency should also aid margins.

Growth prospects

Shalby has expanded aggressively over the past few years. From about four hospitals in 2012, it now has 11, with a total capacity of about 2,000 beds as of November 2017, largely in West and Central India. Most of the company’s revenue comes from inpatient healthcare services.

The chunk of the revenue comes from the company’s six hospitals in Gujarat. Two of these — SG Shalby and Krishna Shalby — both in Ahmedabad, contributed about three-fourth of revenue in FY17. The company’s expansion in other cities such as Jabalpur, Indore, Jaipur and Mohali over the past few years should reduce this concentration risk, going forward. So should upcoming hospitals in Vadodara (150 beds) and Nashik (113 beds) that are expected to be operational in FY19.

Shalby has a strong presence in orthopaedics. According to a Frost and Sullivan report, it had 15 per cent market share of all joint replacement surgeries conducted by private corporate hospitals in India in 2016. With growing demand for orthopaedic procedures in the country and just about 1.4-1.9 joint replacement surgeons estimated per 1,00,000 population, there should be significant opportunity for growth.

Shalby is also strengthening its capability in value-added therapies such as neurology, nephrology, cardiac care, critical care, and oncology, with some of the new hospitals primarily focused on these areas. This strategy should help the company improve its average revenue per operating bed (ARPOB).

Besides, the company is enhancing its outreach programmes through a growing network of outpatient clinics (47 currently) and shared surgery centres (10 currently) within third party hospitals in various Tier I, Tier II, and Tier III cities. This should help it increase its inpatient footfall from various parts of the country. The company also has an international presence through four outpatient clinics and two shared surgery centres.

From 15,348 inpatients and 110,919 outpatients in FY-13, Shalby’s patient numbers increased to 24,704 inpatients and 166,519 outpatients during FY-2017, an annual average growth rate of 13 per cent and 11 per cent respectively.

Asset light model

The company has tried to optimise capital expenditure by adopting an asset-light model — revenue sharing with third-party healthcare service providers. Currently, three hospitals and most of outpatient clinics and SACE are operated under the asset-light operating and managing (O&M) arrangement on a revenue-sharing basis. The company’s upcoming hospitals in Nashik and Vadodara and other future expansions are planned under such models. This should aid profits and margins.

Occupancy to improve

While Shalby has capacity of about 2,000 beds currently, the number of operational beds is 841. The management expects this to improve as new hospitals stabilised and picked up over the past few years.

The company’s average revenue per operating bed (ARPOB) witnessed a drop in FY-16 and FY17; the management attributes this to new hospitals setup. However, in the June 2017 quarter, the ARPOB improved to ₹36,720 from ₹33,032 in FY17.

According to the management, the average lead time for hospitals to turn profitable is about four to five years. In Shalby’s hospitals operated for more than 5 years, the ARPOB in FY-17 was ₹41,087 while the occupancy rate was 46.8 per cent.

This was much higher than the ARPOB of ₹28,059 and occupancy of 35.1 per cent in its hospitals that were operational for more than two years but less than five years. The company has commissioned seven hospitals since 2015. The benefit from the investments made over the last three years should start flowing in from 2018-19.

Over the past four years, Shalby’s consolidated revenue has grown at a compounded annual growth rate (CAGR) of 10 per cent to ₹333 crore in FY17. The company’s profit before tax has grown from about ₹19 crore in FY-13 to ₹53 crore in FY-17.

Operating leverage and cost-efficiencies aided increase in operating margin from 19 per cent in FY 16 to 22 per cent in FY 17. Also, despite increase in debt levels in FY17, the company managed to reduce interest cost with rates renegotiated lower.

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