GPT Healthcare is a hospital operator with four mid-sized, full-service hospitals in its portfolio. It operates under the ILS Hospitals brand from Kolkata (3 locations) and Tripura, Agartala (1 location). The group has an East and North-East focus, and future expansion is also planned in that region.

The IPO is fairly valued at 32 times annualized H1FY24 earnings, which can be supported by its growth plans in existing and new ventures. But the steep discount to peer group valuation, which stands at 59 times FY24 EPS, may not contract anytime soon owing to the lower operating metrics. We recommend investors subscribe to the issue with an eye on earnings growth. The IPO plans to raise ₹40 crore in fresh issue and ₹485 crore in offer for sale through which investor BanyanTree LLC will completely exit.

Scaling up operations

GPT Healthcare can drive growth from existing and new hospitals (yet to be constructed). As can be seen in the table, the occupancy rates of the Howrah and Agartala units are below those of the other two units. Howrah was commercialized in 2019, and with covid impact in the following two years, the unit has reported lower occupancies. From 39 per cent occupancy in FY23, the unit already reported 45 per cent occupancy by H1FY24, which can be expected to keep increasing. Agartala, though commercialized in 2011, had a higher share of renal and kidney transplant procedures, which increased the average length of stay (ALOS) and pressured the occupancy rates. The company indicated an increasing mix of short-term procedures to improve the metrics, which has resulted in an improvement from 45 per cent in FY23 to 52 per cent.

Despite Salt Lake being the oldest facility (established in 2000), a recent restructuring in the unit lowered the occupancy rate to below 70 per cent, and management indicated that the recovery had occurred in Q3FY24 itself. Dum Dum (2013 established) is the gold standard for group operations, reporting 80 per cent occupancy levels.

An improvement in consolidated occupancy rates to a reasonable 64 per cent by FY25 from 60 per cent in H1FY24, along with pricing growth of 6-7 per cent per year, can support 12-15 per cent revenue CAGR and 20-25 per cent EPS CAGR in FY23-25 for GPT Healthcare.

New Facilities

GPT Healthcare has lined up Raipur and Ranchi for the next phase of expansion with a 140/150-bed facility, respectively, expected to be operational by FY25-26. The company will lease the completed facility (currently under construction) from the private lessors in exchange for lease payments. At full utilization, expected in 2-3 years from commercialization, the facilities should add 15-20 per cent to revenues. Being mid-sized facilities in which GPT Healthcare has a strong experience in quick turnaround, bottom-line accretion may also follow. The company will look to expand in similar centres in the East and North Eastern regions in the future as well.

Financials and valuations

GPT Healthcare reported a revenue growth of 22 per cent CAGR in FY21-23 to 360 crores. In the period, EBITDA margins remained stable in the 21 per cent range. The company has a net debt to EBITDA ratio of 0.55 times as on H1FY24, which will further decline with repayments from the IPO proceeds.

Compared to peers (see table), GPT Healthcare is listed at a discount. Industry growth from new unit addition and strong pricing growth is common to all hospital stocks, including GPT Healthcare. But industry valuation seems to be riding on either a high occupancy ratio (KIMS) or a high ARPOB (Global Health and Jupiter). With GPT Healthcare on the lower end of both metrics, similar to Yatharth, the lower valuation range may be sustained.

ARPOB, being a function of brand positioning and marketplace dynamics, will limit further growth. Occupancy ratios have demonstrated 70-80 per cent in Dum Dum, but to consistently deliver across the four mature hospitals is still some time away. For a higher occupancy, the average length of stay must also be reduced from the current 4 days, and the product mix has to incorporate a higher proportion of short-stay procedures. Investors can subscribe to the earnings growth potential, despite the limited headroom in metrics expansion.