Narayana Hrudayalaya IPO: Company's strength lies in speciality segments

Narayana Hrudayalaya operates in high-value specialty areas, such as cardiology and cardiac surgery, nephrology and urology

In most of the initial public offers (IPOs) of late, a general trend has been observed. In almost all the cases, a private equity player wants to cash out along with the company’s plan of raising money. There is an offer for sale (OFS) element during the IPO where only a part of the money raised goes to the company.

But in the case of Bengaluru-based Narayana Hrudayalaya, the purpose of the issue is only to give an exit to the private equity players. Through this public issue, investors like Ashoka Investment Holdings will sell up to 62,87,978 equity shares, Ambadevi Mauritius Holding up to 18,86,455 shares and JP Morgan Mauritius Holdings IV up to 1,22,61,648 shares. Further, even the promoters -- Dr Devi Prasad Shetty and Shakuntala Shetty will be taking some money home by offloading up to 20,43,608 shares each.

Narayana Hrudayalaya has a strong brand name and is among the leading companies in the healthcare space. It is one of the leading private healthcare service providers in India, operating a chain of multispecialty, tertiary and primary healthcare facilities.

At present, the company has a network of 23 hospitals (multispecialty and super-speciality healthcare facilities which provide tertiary care), eight heart centres (super-speciality units which are set up in a third-party hospital) and 24 primary care facilities (including clinics and information centres), across a total of 31 cities, towns and villages in India.

Of the 23 hospitals, four are owned by the company, seven are being operated on a revenue-sharing basis, eight are on lease, while four are run on a management fee basis.

Overall, the company has 5,442 operational beds with a potential to reach a capacity of up to 6,602 beds. In FY 2015, their facilities provided care to over 1.97 million patients.

What differentiates Narayana Hrudayalaya from other hospitals is the market perception that the hospital has its heart in the right place. Dr Devi Prasad Shetty has won Padma Bhushan award for his contribution to the field of affordable healthcare. The company’s hospitals are considered to offer good service at reasonable price. This is reflected in the poor margins of less than 3% at the net profit level.

But the important point to note is that the company is venturing into areas where hospital facilities are scarce, especially in the northeast. Apart from these centres, the company is targeting Lucknow with a multispecialty hospital and Mumbai with a paediatric hospital as the growth centres. It is working with the government on a facility in Vaishno Devi.

Apart from locational advantage, the company’s strength lies in the speciality segments in which they operate. Narayana Hrudayalaya operates in six high-value specialty areas of cardiology and cardiac surgery, nephrology and urology, cancer care, neurology and neurosurgery, orthopaedics, and gastroenterology.

Further, growth for the company is not a costly proposition as it chooses the asset-light model where it moves into an existing asset. In order to expand its footprint, the company is seeking to be a partner of choice with the government and a few charitable trusts.

While the operating matrix of the company is strong, its stress on affordability is impacting margins. Parameters that analysts look at, such as average revenue per bed per day or occupancy rates are not comparable with the best in the industry. It has to be seen if the goodwill of the patients can bring in investors.