The Hindu Business Line : Dolphin Medical Services: Avoid

INVESTORS can give the rights issue of Dolphin Medical Services the skip. Though the issue is priced at a discount of close to 50 per cent compared to the stock's current market price, the manifold expansion in equity, competition in the diagnostic services business and the presence of well-entrenched players in the clinical trials space, which Dolphin intends to enter, are the principal factors that underpin our stance.

Interestingly, the Dolphin stock has seen a sharp spurt in its price over the past week in the run-up leading to the closure of the rights issue. Such an event is not a first-time occurrence. Though the price gain enhances the relative attractiveness of the rights issue, we believe that investors would be better off looking at other options in the large- and mid-cap space, as opposed to parking funds in this micro-cap stock.

Profile

Dolphin provides a range of diagnostic services, including ophthalmic laser care, at Vijayawada in Andhra Pradesh. The bulk of the proceeds (about 85 per cent) from the rights issue is proposed to be utilised to set up diagnostic facilities at Mumbai and Hyderabad, apart from upgrading existing facilities at Vijayawada.

Prospects

Through its expansion into Mumbai and Hyderabad, Dolphin intends to cash in on the positive demand environment that exists. While there is demand, we believe that Dolphin's ability to capitalise on it, given its constraints of lack of size, would be a key challenge. Success in such markets hinges on aggressively marketing services to members of the medical community to gain acceptance; markets in metro cities can be expected to be intensely competitive. Dolphin's lack of a marketing set-up would be a significant drawback in this regard.

The other area that Dolphin intends to focus is the clinical trials space. While the intention is noteworthy, what Dolphin lacks is a headstart. Given the prevalence of a number of diseases, India has become one of the preferred destinations for conducting clinical trials. The diversity of the testing population has spawned not only Indian outfits, but has also led to foreign players such as Quintiles participating to take advantage of this opportunity. In the face of such competition, Dolphin's ability to engage and partner large multinationals, considering its small scale, will be put to the test.

Valuation

Post-rights issue, Dolphin's equity capital is set to quadruple from the current level. While most of the benefits of expansion may be reflected in the earnings card for FY-07, high depreciation charges will also cut into the bottomline. At the current price, the stock trades at about 40 times its expected per share earnings for FY-07 on an expanded equity base, which is certainly not undemanding by any stretch.

Return on shareholder funds, which is already low at 8 per cent for FY-05, is set to fall further this fiscal, consequent to the sharp rise in equity.

Though the company does not have a history of having paid dividends, the steep rise in equity also renders difficult the prospect of payout that provides a decent yield cushion.

Offer details: On offer is 1.2-crore equity shares at Rs 12 each. Meghraj Financial Services is the lead manager to the offer, which opened in December last year. The offer closes on January 25.

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