Aster DM Healthcare: Expensive, but recovery hopes a big plus

Investors with a high risk appetite and long-term perspective can subscribe to the IPO of Aster DM Healthcare, a leading private healthcare service provider in the Gulf (West Asia) region with a chain of hospitals, clinics and pharmacies. The company has a growing business in India too. More than 80 per cent of the revenue comes from the Gulf Cooperation Council (GCC) states, with the rest from India.

A quick glance at the company’s consolidated profit and loss statement leaves one underwhelmed — with loss on the bottom-line in FY16 (₹59 crore) and in the first half of the current fiscal FY18 (₹76 crore), and loss before exceptional items in FY17 (₹307 crore). But a closer look and discussion with the management throw light on the non-recurring nature of the losses in FY16 and FY17 and the seasonality of the business that contributed to the weakness in the half-year ended September 2017.

The company’s loss in FY 2016 and FY 2017 is attributed primarily to three factors — accounting adjustments pertaining to convertible preference shares in Ind-AS, large write-offs in its Saudi Arabian business due to the government renegotiating contracts, and big-ticket expansion (with accompanying costs) to capitalise on the opportunity thrown up by mandatory health insurance in the GCC states.

Besides, the healthcare business in West Asia, unlike in India, is seasonal with the first half of the fiscal invariably weak due to many expatriates going back to their country of origin during summers; so, the chunk of the operating profit of the company accrues in the second half. The seasonality impact coupled with the commissioning of two new hospitals contributed to the loss in the half-year ended September 2017.

Scope for growth, profit

From ₹3,876 crore in FY15, the company’s consolidated revenue grew to ₹5,931 crore in FY17, aided by aggressive expansion. With the overhang of accounting adjustments and write-offs behind it, the company should see the expansion initiatives, of the past and in the future, translate into good profit growth too.

From 149 operating facilities in five countries in FY13, the company had 323 operating facilities in nine countries by the first half of FY18. As on September 2017, the company had a network of 19 hospitals, 98 clinics and 206 retail pharmacies across the GCC states and India. The bed capacity increased from 1,419 in FY13 to 4,754 as of September 2017.

Given the high potential for healthcare services in West Asia and in India aided by growing insurance cover plans, the company is in the process of building or expanding 10 hospitals (five each in GCC and India); this is expected to add about 1,700 beds in the next two to three years. Profit growth should also be aided by lower finance costs, with the chunk of the IPO proceeds (₹564 crore out of ₹725 crore) being used to repay debt that would also bring the debt-to-equity ratio to less than 1 from about 1.6 times now.

At the upper end of the price band (₹180-190) and based on FY17 financials, the issue seems expensively valued with enterprise value (EV) to EBITDA at about 35 times, higher than what hospital chains in India trade at (18-23 times). But this is due to the company’s weak show in FY17. With expected improvement in financial performance, going forward, valuations should moderate considerably.

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