Rainbow Children Medicare IPO opens tomorrow: Here's what analysts suggest

Analysts have flagged concerns around increased competition from bigger hospital players, and the inability to sustain profitability levels.

The Rs 1,581 crores-initial public offer (IPO) of Hyderabad-based Rainbow Children’s Medicare Ltd will open for subscription on Wednesday, April 27, and close on Friday, April 29.

The IPO consists of a fresh issue of shares worth Rs 280 crores and an offer-for-sale worth Rs 1,301 crores by the company’s promoters and selling shareholders. The price band of the issue has been fixed at Rs 516-542 per share.

The firm is a multi-specialty paediatric and obstetrics and gynaecology hospital chain operating 14 hospitals and three clinics in six cities with a total bed capacity of 1,500 beds.

While analysts are positive on the issue from a long-term perspective given the company’s focus on specialised services, strong clinical expertise, and strong track record of financial and operational performance, they have flagged concerns around increased competition from bigger hospital players, and the inability to sustain profitability levels.

Here’s a compilation of brokerage views on the issue:

Swastika Investmart | Subscribe for long-term
The exponential rise in the company's profit during 9 months till December, 2021, might not continue in the future as it was driven by Covid-19 hospitalisations.

The profitability for 9 months ended 31st December 2021 increased substantially to Rs 126.41 crores from Rs 38.53 crores in the same period of last fiscal.

"The specialised nature of the business, experienced management team, proven ability to attract, train and retain high-calibre medical professionals, under penetration of hospitals in India, makes this issue good for long-term investors," said  Santosh Meena, head of institutional research at the brokerage.

Angel One | Neutral
The hospital's 70 per cent plus current bed capacity is matured beds, with higher occupancy rates. This is a major positive for the company, in addition to its dominant market position in South India for paediatric and obstetrics.

However, the brokerage believes it could be challenging for the company to maintain EBITDA margins given its plans to increase capacity by 500 beds in the next 4-5 years.

"Average revenue per operating bed (ARPOB) has increased by 57 per cent in the last two years, but it will be difficult to increase it from these levels, which will create pressure on EBITDA margins," said Yash Gupta, Equity Research Analyst at the brokerage.

Based on April-December 2021 numbers, the issue is priced at a price to earning ratio of 30.4 times and EV/EBITDA of 13.8 times at the upper price band, which is in-line with listed peer group.

Axis Capital | Not rated
The ability to recruit and retain high calibre medical professionals is a plus. The chain follows a doctor engagement model where most of their core specialists work exclusively at the hospitals on a full-time retainer basis. This model has led to a high degree of full-time doctor retention (at 81 per cent during April 2019 to March 2021).

Moreover, it follows a hub-and-spoke model in Hyderabad. This model has strengthened their market position in and around Hyderabad, providing them with synergies through referrals for tertiary and quaternary care to their hub arising from the spoke hospitals.

Kotak Securities | Not rated

The hub-and-spoke model has enabled them to evolve from a single secondary care hospital in Hyderabad to six hospitals in the city. The company is implementing a similar model in Bengaluru, Karnataka and planning to replicate it in Chennai, Tamil Nadu and New Delhi-NCR.

Moreover, over the last six years, they have added 985 beds across 10 hospitals, expanding their presence. Going forward, they may seek to expand the hospital network through the acquisition of brownfield assets or development of greenfield assets.

Key risks

Analysts said the company’s revenues are highly dependent on hospitals in Hyderabad and Bengaluru. It is also significantly dependent on certain specialties for a majority of its revenues. It may face intense competition from other healthcare service providers. And lastly, its reliability on third-party suppliers, manufacturers and services providers for supplies and equipment and other services exposes it to major risks.