Amongst the rush of IPOs last year, Rainbow Children’s Medicare has been a moderate success from a returns perspective. Since the IPO, the company has reported 12/16 per cent growth year-on-year in revenue/PAT in 9MFY23, owing to increased bed count, improved realisations and occupancy. The stock returned 31 per cent from upper band of its IPO price.

We at bl.portfolio had recommended subscribing to the issue at the IPO and reiterate the recommendation now with an accumulate rating on the stock. The stock, which continues to trade at 31 times one-year forward valuations, similar to at the time of IPO, can gain from maturing hospital profile, differentiated model in healthcare and expansion of its proven hub-and-spoke model. The healthcare segment, with tailwinds from increasing purchasing power and defensive nature, will be valued in the current environment and Rainbow’s stock offering — a specific niche within healthcare segment — should outperform the broader markets.

Differentiated offering

Rainbow is a multi-speciality hospital but for children and has extended into Obstetrics (pregnancy) and Gynaecology, primarily to provide care continuum in childcare. As a result, Rainbow is placed between - boutique hospitals focused on obstetrics and adult-multispeciality hospitals. The Hyderabad-based hospital is well-established in the region and has finetuned its hub-and-spoke model.

It has entered Bengaluru, Chennai and NCR regions with the same model and is reporting a strong traction as well. The company, with a wide presence across the country, can focus on organically improving its regional presence with its hub-and-spoke model.

The hubs handle procedures higher up the order, including quarternary and tertiary care, and the spokes conduct primary and secondary care procedures. Within the larger under-penetration of general healthcare in the country, pediatric multispecialty healthcare is further lacking. This has allowed Rainbow to reach for urban centres such as Bengaluru, Chennai and NCR regions to expand and gain strong traction in these regions. Rainbow has a strong training programme and doctor retention in the multiple paediatric disciplines which otherwise can be a challenge.

Growth drivers

Hospital revenue growth is driven by volume (bed count and occupancy) and pricing (ARPOB – average revenue per operating bed). Being a recent entrant in regions outside of Hyderabad, Rainbow can sustain volume growth, and owing to under-penetration of quality healthcare to rapidly growing middleclass, pricing growth is common in the industry.  

Rainbow can expect to sustain 10-12 per cent revenue growth per year through bed count addition itself, but the execution may be lumpy from year to year. The company has added 55 beds to increase its tally to 1,555 in 9MFY23 by commercialising its first spoke hospital in Chennai at OMR to the hub at Guindy. Another spoke in Financial district, Hyderabad, should add an additional 90 beds by Q4FY23, increasing the tally by 140-150 in the fiscal.

The company similarly plans to add 150-200 beds per year in FY24 as well and, further every year to reach 1,000 additional beds. Another 80-bed spoke hospital at Anna Nagar, Chennai, and 60-bed hospital in central Hyderabad can be expected in FY24. Also, existing facility in Hyder Nagar, Hyderabad, will increase bed count by 50 in FY24. Bengaluru (60 beds) and Rajahmundry, Andhra Pradesh (100 beds), will be the next phase of expansion with land and permissions in place, to be commercialised in 18-24 months.

Pricing growth can be expected in the 6-8 per cent range for hospitals. Rainbow also has concluded the recent round of price hikes in the same range through insurance negotiations, which are the largest payors for Rainbow.

But beyond volume addition and price growth, Rainbow, with a higher proportion of  recently commercialised facilities, can expect a sustained improvement in occupancy levels, which can shoulder the revenue growth for a longer period.

The mature cluster at rainbow (more than five years of operations and 78 per cent of Q3FY23 revenues) has reported occupancy of 63 per cent compared to new facilities’ 42 per cent. Rainbow’s Hyderabad facility, with 20 years of operations, reports occupancy levels of 72-74 per cent which, over time, most facilities can reasonably expect to achieve. In the overall portfolio of 1,700-1,800 operational beds expected at Rainbow by FY24-25, the mix will be split between mature and new facilities; new hospitals (500 capacity beds currently), expected to be commissioned in FY23 (150 beds), in FY24 (150-200 beds) apart from expansion in existing facilities. As the new facilities with established hubs in Chennai, Bengaluru and Delhi scale up on occupancy, revenue growth should be sustained.

Financials and valuation

Consensus estimates 17 per cent revenue CAGR in FY22-24 (Bloomberg) over the ₹963 crore revenue reported in FY22. As occupancy, and hence profitability, of new facilities improves the consensus estimates a higher growth in EPS for the same period at 28 per cent. The company can finance the expansion plans internally. The company valuations are comparable to peers, with Rainbow trading at 31 times FY24 earnings, compared to 50/28/26 for Apollo Hospitals, Krishna Institute and Narayana Hryudayalaya.

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