Will Krishna Institute of Medical Sciences’ inorganic push boost its stock?

Krishna Institute of Medical Sciences has been on a steady capacity addition streak in the last one year. Recently, the company acquired 51 per cent stake in Nagpur-based Kingsway Hospital for a cash consideration of ₹80 crore. The multi-speciality hospital with 250 operational beds was started in 2019 and the existing shareholders will continue to hold the remaining stake. The company generated ₹48 crore in revenue at an EBITDA margin of 5 per cent.

This will be the second venture into Maharashtra for KIMS. In May this year, KIMS announced a majority stake in KIMS Manavata, a venture to develop a 325-bed multi-speciality hospital in Nashik. KIMS will hold 51 per cent, with the other 49 per cent held by Dr. Raj Nagarkar, a leading oncological surgeon in the region. This venture, with a cash infusion of ₹48 crore for the majority stake, is expected to be functional by March 2024. KIMS has made a start to its westward expansion from its current fort in Telangana and Andhra Pradesh. The company has declared its intent of scouting for further opportunities in Mumbai and Pune with the recent acquisition’s press release as well.

Within the State as well, the company is in the process of integrating a comparably bigger acquisition, consolidated from April 2022. KIMS acquired a 51.07 per cent share in Sunshine hospitals for ₹363 crore operating a 600-bed hospital with leading presence in orthopaedics and joint replacement surgeries. In the first quarter after the consolidation in Q1 of FY23, KIMS reported a 25 per cent jump in ARPOB (average revenue per operating bed) to ₹30,000 and a 500-basis points dip in EBITDA margins to 26 per cent. The integration efforts will include adding multiple specialities to Sunshine’s orthopaedic dominated revenue (reason for higher ARPOB) and other cost efficiencies, which should improve the margin profile.

KIMS’ differentiated business model had allowed for high EBITDA margins, operating at a lower ARPOB range (within multi-speciality group). One reason was the high levels of doctor engagement in ownership which allowed for lower operating costs. KIMS operated five hospitals in this model across Vizag, Kondapur (Hyderabad), and three more in AP. Now with Sunshine and also, Kingsway (Nagpur) and KIMS Manavata (Nashik) operated with significant (not controlling) stake from other shareholders (generally doctor-managerial teams), the model can be further replicated.

The inorganic expansion is in addition to organic growth prominently in Bengaluru operational in next 15 months with 300 beds. The company was operating 3,666 beds by the time of Sunshine acquisition, compared to the 3,000 beds it had at the time of IPO in June 2021. Aided by the recent undertakings in Maharashtra, the company is well on its way to exceeding 4,000 beds in the next one-two years. This, along with KIMS’ proven ability to turn around loss-making hospitals, should be a positive indicator. The accelerated pace of expansion should bear on the blended financials of the company, till the mature hospital’s revenue proportion outweighs recent additions.

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