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Krishna Institute of Medical Sciences (KIMS), the largest corporate healthcare provider in the states of Andhra Pradesh and Telangana, is coming out with an IPO to raise ₹2,144 crore. The issue consists of ₹200 crore in fresh issuance and ₹1,944 crore from offer for sale. The IPO is set at a price band of ₹815 – 825 per share and will be open for subscription between June 16-18.
Post IPO, the promoter group and a large shareholder - General Atlantic Singapore, will retain around 38 per cent (47 per cent pre IPO) and 20 per cent (40 per cent) of shareholding respectively. Post the IPO, the promoters pledging is expected to decrease to less than 10 per cent from 35 per cent earlier.
With 3,064 bed capacity across nine hospitals in Andhra Pradesh and Telangana, KIMS has a good presence in in Tier I and Tier II/III cities in the two southern states. With over two decades of operations, KIMS commercialised a third of its current capacity in 2017 only, indicating its preference for spaced growth rather than rapid expansion. KIMS relies on scale, firm regional understanding and doctor retention to drive its business.
The IPO values the company at a PE of 31x FY21 earnings and an EV/EBITDA (FY21) of 17x. This compares reasonably well versus peers. The valuation at an absolute level is also reasonable considering the revenue and adjusted earnings CAGR of 24 per cent and 40 per cent respectively that the company has delivered between FY18-21. The company’s industry leading operating margins and strong balance sheet (net cash positive) are also positives.
Long-term investors can subscribe to the IPO given its valuation and the potential opportunity it provides to benefit from increasing penetration of healthcare services in a post pandemic world.
Better operating profile
KIMS with lowest realisations in the industry has comparatively better operating cost profile driven by operational leverage and land cost control. Average revenue per operating bed (ARPOB) for KIMS at ₹21,000 per day per occupied bed, is in lower rung of the industry range (₹16,000-51,000) with prices of its procedures at around 20 – 30 per cent lower than peers. Even so, the adjusted EBITDA margins improved from 20 per cent in FY18 to 22 per cent in FY20 and more recently to 28 per cent in FY21, as improvement was witnessed across hospitals.
The EBITDA margins for mature hospitals (operating for more than four years) improved from 21 per cent in FY18 to 26 per cent in FY20 as the percentage of quaternary and tertiary care improved and recent hospital additions turned profitable at the operating level. As per the management, with close to 60 per cent of costs being fixed in nature, incremental revenue generated beyond certain threshold, has a higher pass through to the bottom line, facilitating such jumps in margins.
KIMS has maintained a bed occupancy rate of 80 per cent in FY20 improving in tandem with new facilities scaling up. The pandemic impacted 9MFY21 saw a dip in occupancy rates to 72 per cent but the period was also marked by higher cash and insurance payments with higher ARPOBs and longer stays. These factors could have added 100 basis points to the 28 per cent margins recorded in FY21, according to the management. KIMS reported a revenue growth of 18 per cent in FY21.
Growth Plans
For the next phase of growth, KIMS is planning to consolidate its existing base with 1,000 more beds. In the next three to four years, it also plans to expand into neighbouring states by studying patient flows, regions where their brand can be identified with and underserved micro-markets within Chennai and Bengaluru regions.
The company has already identified four acres of land in Chennai for a Greenfield hospital with 300 beds in the first stage with a capital outlay estimated at ₹80 – 90 lakh per bed.
KIMS had earlier investments at ₹60 lakh for Tier I cities and ₹ 22 lakh for Tier II/III cities which were lower than industry standards. The management feels that the higher ARPOBs will sustain the higher capital outlay for expansion.
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