The Hindu Business Line : Lotus Eye Care Hospital: Invest at cut-off

Investors can consider investing in the initial public offering of Lotus Eye Care Hospital (Lotus) with a two-three year perspective. The business of running eye-care hospitals is resource intensive and highly skill-dependent but there is potential given the rise in diseases related to eyes.

At present, Lotus has its super-specialty hospital at Peelamedu (Coimbatore) and three other network hospitals at Tirupur, Salem and R S Puram (Coimbatore). This gives it nine operation theatres and three LASIK equipment along with total bed strength of 120, excluding eye-camp beds.

Growth

Given the superior operational as well as profitability metrics displayed by Lotus in the last three years and experienced management, the company could be expected to leverage the strong demand for quality eye-care, albeit within its region-specific limitations.

Earnings could be ramped up when Lotus sets up two primary eye care (preliminary) units in Bangalore and one in Chennai, secondary eye care units each at Coimbatore (R S Puram), Tirupur and Karur, and a tertiary care ( for handling complicated eye diseases) unit at Salem.

Valuation

Lotus’ Rs 55 crore capex plan is expected to be funded with IPO proceeds (Rs 42 crore), internal accruals (Rs 3 crore) and debt (sanctioned term loans aggregating to Rs 10 crore).

The fruits of a significant portion of the project are expected to show up only from September 2009.

At the price band of Rs 38-42 per share, the issue is priced at about 19-21 times the likely FY10 per share (post-issue) earnings.

While the comparatively small size and limited scale of Lotus may seem as a concern when seen in light of its listed peers such as Kovai Medical Centre and Hospital, and Dr Agarwal’s Eye Hospital — Lotus’ focus on eye care (operations are mostly day-care) is expected to help it maintain higher margins, as well as profitability.

Business

Lotus earns 60-65 per cent of its revenues from surgeries and is expected to gain from the demand for private medical care providers in the ophthalmology space. Industry-wise, cataract surgery, refractive surgery and glaucoma procedures account for 90 per cent of the surgical operations in the eye-care space.

With the use of superior technologies such as LASIK (Laser-Assisted In Situ Keratomileusis) and Zyoptix, companies such as Lotus have been able to enjoy better margins and high rates of success.

The network of primary and secondary eye-care units are expected to ramp up revenues through own primary care referrals and individual practitioners, while the two tertiary care hospitals would ideally deal with more complicated cases.

Threats

Risks to the offer include the expected competition from local speciality hospitals operating in the eye-care space, longer time-periods to complete capex, higher than anticipated depletion of margins, appointment as well as retention of qualified personnel at new and old units. Any adverse developments to the image of the business may also present risks to our recommendation.

The offer, managed by Keynote Corporate Services, closes on June 17.

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