The initial public offer by Bengaluru-based hospital chain Narayana Hrudayalaya, promoted by veteran cardiologist Devi Shetty, opened on Wednesday. The issue is an offer-of-sale by its promoters — Devi Prasad Shetty and Shakuntala Shetty, and private equity investors — JP Morgan and Ashoka Holdings.

With a network of 56 healthcare facilities, the company caters to the medical needs of 1.97 million patients annually. Here are three reasons why we think Narayana Hrudayalaya may be geared to sustain healthy growth over the next three to five years.

Recovery in profit margin First, the company had acquired about 14 facilities (many of these on a management contract basis) in the last three-four years. This led to a sharp decline in its operating profit margin to less than 10 per cent in 2014-15 from about 12.7 per cent in 2011-12. Given the average lead time of three-five years for hospitals to turn profitable, the pay-off from investments made over the last four years is expected to start flowing from 2016-17.

The company’s profit margin has recovered in the first half of fiscal 2015-16 to 11.1 per cent.

Rising occupancy level Second, occupancy levels at Narayana’s key hospital clusters — Karnataka and eastern cluster which account for over 80 per cent of its overall revenues — has been on the rise. For instance, occupancy for its eastern cluster has risen to 55.1 per cent from 48.6 per cent in 2012-1. Likewise for the eastern cluster, occupancy has grown to 54.3 per cent from 53.92 per cent.

Third, focus on better margins, non-cardio/non-renal treatments, such as neurology, anti-cancer, orthopaedic and gastroenterology, will help the company improve its average revenue per operating bed over the next two-three years. The contribution from the non-cardio/non-renal segment to the total in-patient revenue has gone up to 38 per cent in 2014-15 from about 32 per cent in 2012-13.

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