Wockhardt Hospitals IPO - Avoid

Wockhardt Hospitals is a leading private healthcare services provider in India with focus on core areas such as cardiology and cardiac surgery, orthopedics, neurology and neurosurgery, urology and nephrology and critical care, with specialisation in minimally invasive surgery. It has a network of 10 super-speciality hospitals and five regional speciality intensive care unit (ICU) spread across western, eastern and southern India. Of these, six are greenfield properties, while the balance nine represent brownfield expansion. The company also owns and operates ten pharmacies located at its facilities.

As part of its expansion plan, Wockhardt Hospitals is adding three greenfield hospitals (one each at Kolkata, Mumbai and New Delhi) and is expanding the bed capacity at Wockhardt Heart Hospital, Mumbai. In addition, Wockhardt Hospitals will also add six brownfield hospitals at Goa, Bhavnagar, Nasik, Bhopal, Ludhiana and Jabalpur. On completion, the expansion will add 2,127 beds, raising the capacity from 1,374 beds end December 2007 to 3,501 beds end December 2009.

The expansion plan involving a capital expenditure of Rs 636.35 crore will result in a pan-India presence for Wockhardt Hospitals. It had spent Rs 66.88 crore on the expansion plan end December 2007 and intends to fund the balance requirement of Rs 569.47 crore by tapping the capital markets. In addition, the company would also utilize around Rs 285 crore of the IPO proceeds to pre-pay short-term loans.

Wockhardt Hospitals has entered into a memorandum of understanding with Al Bateen Investment Co, an Abu Dhabi-based company, to provide expertise in setting up, managing and operating hospitals to a special purpose vehicle (SPV) that will pursue healthcare initiatives in Abu Dhabi. To start with, a greenfiled hospital specialising in women's and children's care would be the first project. The SPV will also explore brownfield opportunities in Abu Dhabi.

Around 2.51-crore equity shares are being offered by Wockhardt Hospitals. Of these, five lakh are for employees. As such, the net offer to the public would be around 2.46-crore equity shares. In January 2008, the company raised around Rs 149.33 crore by making two pre-IPO placements with BCCL (16,12,903 equity shares at Rs 310 per share) and with CGMMPL (33,00,000 equity shares at Rs 301 per share), constituting 1.5% and 3.2% of the post-issue equity share capital, respectively.

Strengths

The healthcare sector is evolving rapidly in the county. Healthcare-spend equaled around US$ 35 billion or 5.2% of GDP in 2004. Growing at a compounded growth rate of 12%, healthcare-spend would rise to around US$ 60 billion by 2009. The growth would be fuelled by changing demographic profile, rising incidences of lifestyle diseases and increasing medical expenses. Popularity of health insurance and growing medical tourism would also contribute to the expected growth. As private players are expected to continue to control a majority of the healthcare spend, players such as Wockhardt Hospitals would be major beneficiaries of the boom. .

A well recognised brand. Only India-based private hospital group associated with Harvard Medical International (HMI), a self-supporting not-for-profit subsidiary of the Harvard Medical School. Agreement with HMI in 2000 was amended and restated in 2004, and extended until 2010. HMI provides education and training and helps in designing facilities, developing clinical programs and setting up quality management and other systems and protocols.

Weaknesses

Property in Mumbai and two properties in Bangalore accounted for around 71% and 68% of total income in the year ended March 2007 (FY 2007) and in the nine months ended December 2007. These three hospitals collectively comprised around 35% of the total bed capacity. Due to this concentration, any negative economic, regulatory, competitive or other developments may adversely impact the operations, and disturb the financial performance.

The Bannerghatta Road, Bangalore, and Kolkata properties are enmeshed in litigation. Upcoming hospitals in Kolkata and South Mumbai are also subject of litigation, and so also three-brownfield properties at Nagpur, Rajkot, and Vashi, Mumbai.

Valuation

There are very few listed major players with multi-location presence such as Apollo Hospitals, Fortis Healthcare and Wockhardt Hospitals in the healthcare sector. Among the three, the bed capacity of Wockhardt Hospitals is more or less at par with Fortis Healthcare (around 1,400 beds) but is much lower compared with Apollo Hospitals (around 7000 beds). Occupancy rate for Wockhardt Hospitals was the lowest among all in FY 2007: Apollo Hospitals (77%); Fortis Healthcare (72%) and Wockhardt Hospitals (68%).

Net sales jumped 49% to Rs 236.48 crore, but profit grew a mere 8% to Rs 15.54 crore due to surge in interest costs and erosion in margin in FY 2007. Revenue of Rs 259.48 crore in the nine months ended December 2007 surpassed that of FY 2007. Margin increased 420 basis points to 20.8%. But the annualised surge in interest cost by 177% to Rs 23.56 crore (actual) eroded the gain, leading to an annualised fall in net profit of 36% to Rs 7.41 crore (actual). The company’s debt:equity ratio is high at 5:1.

At the offer price band of Rs 280-Rs 310 and on FY 2007 earning, the P/E works out to 187.9 (on the lower band) and 208 (on the upper band). The revenue growth, margin is superior to both Apollo Hospitals and Fortis Healthcare. But the 451% rise in interest cost (annualized nine-month figure) between FY 2006 and nine months ended December 2007 has played havoc, making meaningful comparison difficult. If interest costs can be cut down substantially, which may happen after the IPO, the bottom line will improve. However due to the long gestation and high capital intensive nature of new hospitals and high running costs, reporting a healthy EPS will take time. At the lower and the higher price band, Wockhardt Hospitals’s market cap of Rs 2919 crore and Rs 3232 crore will be higher than Apollo Hospitals’s market cap of Rs 2893 crore and far higher than Fortis Healthcare’s market cap of Rs 2190 crore on 18 January 2008. Subsequent market fall has further weighed the scales against it. Consistent profit and good expansion plans make Apollo Hospitals a better bet than Wockhard Hospitals. Hence, paying a higher market cap to Wockhard Hospitals does not look reasonable.

Reference:- www.capitalmarket.com

ANURAG DUJARI

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