HealthCare Global IPO: Niche, high demand play

Ability to quickly scale up network and improve profitability will be key

Bengaluru-based cancer care specialist HealthCare Global Enterprises is planning to double its bed capacity and cancer centres to tap the growing demand for cancer treatment, especially in non-metro locations.

The company, which currently operates 14 comprehensive cancer care centres, is looking to take the number to 26 and number of beds to 1,817 from the current 902.

The number of new reported cancer cases, which is currently growing fast, are expected to double from 1.1 million 2015 to 2.1 million in 2020. EY believes that the real number (including unreported cases) is about 1.5 to 2 times the reported number.

The reasons for the jump in cancer incidence is an ageing population (262 million by 2020) as cancer rates increase with age especially after 50, exposure and consumption of tobacco and alcohol, processed foods, lifestyles and air pollution especially in urban India. Apart from domestic demand, given lower healthcare costs, the proportion of foreign patients looking for cancer treatment too is expected to increase. Currently, about 18 per cent of the company’s cancer patients are foreign nationals.

Given the demand and the lack of supply (only 200-250 cancer care centres with government hospitals accounting for only 15 per cent), the company which is the largest private provider of cancer care in India could benefit if demand moves up as estimated.

The company would be using the IPO proceeds to purchase medical equipment (Rs 42 crore), upgrade its IT infrastructure (Rs 30 crore) and pre-pay about Rs 147 crore of its overall debt of Rs 370 crore at the end of December 2015. About 60 per cent of the IPO is an offer for sale by existing investors (and to a small extent by promoters) while the rest is fresh issue of shares.

The other focus area of the company is the infertility treatment business which it ventured into post the acquisition of 50 per cent stake in BACC Healthcare in 2013. While about 27.5 million couples are estimated to have infertility issues, only 0.3 million seek treatment due to lack of awareness, access to fertility clinics and the high cost of treatment. Although the fertility business accounts for less than 10 per cent of revenues, its margins are slightly higher than the cancer segment. The company, which has four infertility treatment centres, plans to add three more centres going ahead.

Given the capex required to scale up operations and the gestation period, faster execution is a crucial factor for HealthCare Global if it wants to improve profitability and report net profits on a sustainable basis. The completion of its expansion activities over the next couple of years should help improve margins, which are currently at 15.5 per cent. Cancer and infertility units, which are mature (five years or more), earn operating profit margins of 25 per cent. Higher operational expenses and interest burden due to ongoing expansion has pegged back the company’s margins and profits. The part payment of the loan should help bring down the interest cost and better terms from vendors on equipment financing should aid in improving the bottom line.

At the upper end of the price band, the issue is priced at 16-17 times its FY17 Enterprise value/Ebitda estimates which is at a discount (13-60 per cent) to listed peers such as Apollo Hospitals, Narayana Hridayalaya and Fortis Healthcare. The valuations are reasonable and discount justified given that the listed peers are much larger and multi-specialty players. Investors who have at least two years investment outlook may consider the issue.