Investors can give the initial public offering (IPO) of Birla Pacific Medspa a miss. Limited operating history, unimpressive financial performance and high execution risks underscore our recommendation. In the two years of its operations, the company has made losses both at the net as well as operating profit levels. While to an extent the company's business is long gestation , we feel investors may be better off avoiding the IPO for now. Valuations aren't too attractive even at the price band of Rs 10-11; the offer is priced at EV/Sales multiple of about 26 times (annualised FY11 sales on a post offer equity basis). Though there isn't any strict comparable here to set a valuation benchmark, the many execution risks at this stage makes the offer unappealing.

Company overview

Birla Pacific Medspa belongs to the Yash Birla Group of companies. It started its first Med Spa in November 2008 at Prabhadevi, Mumbai, and is positioned as a one-stop centre offering a range of scientific makeover solutions to enhance beauty. It presently operates healthcare centres under the brand name EVOLVE and has five own EVOLVE centres in Mumbai at Walkeshwar, Bandra, Andheri, Worli and Borivali and two centers on franchise basis at Thane and Chennai. Evolve Med Spa, offers comprehensive treatments in the areas of cosmetic dermatology, cosmetic surgery and advanced dentistry. These include botox, skin tightening, hair removal, breast augmentation and reduction, liposuction, rhinoplasty (nose job), facelift and implant dentistry among others. It also offers a range of spa services — wet and dry under its wellness initiative.

Prospects and Challenges

No doubt, the ‘med spa' segment of the wellness industry is an emerging business in India and is, therefore, brimming with growth possibilities. However, to what extent Indians would be willing to go and spend on acquiring ‘beauty' remains to be seen. The ‘med spa' business is largely a virgin market. Birla Pacific Medspa, however, does have some key positives. For one, it would enjoy an edge, given that it is the sole organised play (comprehensive in scope) in an otherwise unorganised market. It can also draw upon the experience and expertise of its erstwhile joint venture partner, Pacific Healthcare, which is a leading healthcare chain based in Singapore.

Note that Pacific Healthcare holds equity interest in the company (7.2 per cent of its pre-offer equity base). Its strategy to centre its various services on doctors (and not technicians) may also hold sway. Currently the company has a panel of 12 doctors who offer their services as consultants on part-time basis at the EVOLVE centres. Strengthening medical tourism trends in India could also help.

That said, though the business and its model are tested in other countries, it is still early days in India, with the company planning on setting up shops in Tier-I and Tier-II Indian cities. Of the total Rs 65 crore of the IPO proceeds, it plans to use about Rs 49 crore to establish 55 owned outlets. Note that the company plans on expanding presence through owned outlets only and not through the franchise model. It plans on discontinuing the franchises in Thane and Chennai on the conclusion of their pact (January 2014 and June 2012 respectively). It may take at least a year for its outlets to begin operations, provided there aren't any execution delays.

Turnaround, therefore, becomes a distant possibility. What also weighs the offer down is the unimpressive financial performance so far. In the nine-months ended December 2010, the company reported a topline of about Rs 1.6 crore as against Rs 1.5 crore sales reported in the six-months to March 2010. While not strictly comparable, when annualised, it adds up a decrease of about 28 per cent. During the two periods, the company reported losses of about Rs 3.7 crore and Rs 3.3 crore respectively.

Related Topics
comment COMMENT NOW