Healthcare IPOs — An Inside Out View

Healthcare IPOs are few and far in India. But would that change in the coming months with several providers eyeing domestic listing. HE finds out.

Entrepreneurs often have a fascination about Initial Public Offerings (IPOs). Many regard it as the sign of success rather than a stage of their journey. Interestingly, it has also been considered by venture capital industry as one of the desired paths to exit. However, IPO is somewhat an elusive concept for many Indian healthcare entrepreneurs.

Many think that it is only about proving a business concept to show that they are profitable. But market is more complicated and unpredictable than that. Demonetisation, Brexit and even Trump’s Presidency will have an impact on the IPO.

Yet, several experts suggest that 2017 will be a good year for Healthcare IPOs. “The success of initial public offerings (IPOs) — four key IPOs over the last 18 months — Dr Lal PathLabs, HCG, Narayana Hrudayalaya and Thyrocare — all IPOs were oversubscribed, reinforcing investor confidence in the sector,” states a PwC report.

Dr Sameer Gupta, Interventional Cardiolgist at Metro Hospitals and Heart Institute, Noida, points out that healthcare providers aspire to go public primarily due to financial benefits. “An IPO helps a hospital to create a stronger balance sheet, better corporate governance policies, brand building as well as attracts talented employees to the organization . Public market investors are much bigger than private market investors and therefore hospitals can raise significant amount of money through acquisition.”

For instance, Ahmedabad-based multi-specialty chain Shalby Hospitals Ltd, earlier tried to raise funds through Private Equity, but later decided to list as it would help them to raise more money

But, do Investors prefer listed Hospitals than unlisted Hospitals?

According to Gupta, there are takers for both. “The investment opportunities in healthcare has increased significantly, and it is an attractive segment for both Private Equity and Venture Capital Investors. On the other hand, high profile initial public offerings of companies like HCG has definitely boosted investor enthusiasm. Today most of the healthcare IPOs have lived up to expectation and this will create better prospects for other players,” he adds.

Are there characteristics which best suit an Initial Public Offering?

Clearly, to get listed on the stock exchange, companies need to meet some criteria and requirements. These requirements are made to make sure that companies which are listed on stock exchange have a critical size.

“The requirements for listing a healthcare firm are quite expensive and elaborate . Just having liquidity of shares doesn’t guarantee that value achieved by IPO will be greater than they would have achieved by other means,” says Suresh Ramu, co-founder and CEO, of Cytecare Cancer Hospitals.

He notes that healthcare is a good bet and has received lot of money from investors. “Some of them want to exit, that’s why there are more IPOs now. For a long time, there were only two listed assets, Apollo and Fortis. Now there are other players too and they are on an expansion spree. The capital raised is either used to pay off existing debt, fund capital expenditure or for R&D activities,” he explains.

Clearly, an IPO also involves significant work for the top executives.

Dr Nagaraju Bathini, CEO of Sunshine Hospitals points out that considerable amount of senior management would be consumed by the IPO. This is a significant burden on the hospital and requires that rest of the team to bear the burden. The market has different types of IPO listings from big multi-specialty chains to single specialty hospitals. Even then number of healthcare IPOs is relatively small. But that could change with the success of IPOs such as Narayana Hrudayalaya and Thyrocare,” he adds.

Performance of Healthcare IPOs

Even though, Narayana Hrudayalaya, registered a net loss of Rs 10.9 crores in the previous financial years,the private healthcare service provider raised Rs 613 crore via the IPO.

According to news reports, shares of Narayana Hrudayalaya Ltd rose almost 35% on the healthcare chain’s trading debut last year.The stock, sold at Rs.250 per share, closed at Rs.336.70. The largest number of bids came in from foreign institutional investors (FIIs) under the qualified institutional buyers (QIBs) quota, which was subscribed 24.4 times.

Global Win — Win

Equity markets across most countries are doing well, and the Indian market is no exceptions

Factors that affect success of a Healthcare IPO

It is hard to get sufficient data to be able to build a predictive model for a healthcare enterprise. Oncology chain HCG failed to attract investors on its stock market debut. Many experts pointed out that this was due to the premium pricing, even though it had history of losses and slow growth rate.

Bathini points out that a hospital should have a strong competitive advantage and sufficient growth potential to achieve a reasonable capitalization value . “There are significant disadvantages to being publicly traded: the cost and burden of having to comply with SEC rules, competitors having full transparency into financial results and strategy, and that public companies run the risk of being bound to the quarterly “score card”. Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long term growth,” he adds.

The next major factor for the success of a healthcare IPO is timing. Several healthcare providers shelved their IPO plans, after government’s demonetisation drive last year. New Delhi Centre for Sight gave up IPO plans due to the volatility of market. Similarly, Aster DM Healthcare, who filed a draft proposal in July 2016 for a $300-million listing also postponed its IPO plans. Recently, Aster DM has re-filed for public listing.

Depth and Experience of Management

Another factor is the depth and experience of management team and the brand value of promoters. Again, it’s not surprising that shareholders back hospitals with promoters like Devi Shetty with significant technical expertise.

Who should you bet on

In the case of hospitals, financial information and non-financial information is also equally important to understand the financial health of a hospital. Data such as Average Length of Stay, Occupancy rate and net revenue per patient can also provide valuable information about the hospital. Healthcare Executive analysed the annual reports of the top hospitals. The results are given below:

To Do or Not to Do

Finally, a healthcare service provider must have the best possible advisors to navigate the market. There are huge risks in going public, that’s the reason why some of the biggest companies like Flipkart have not gone public. Advisors and investment bankers are expected to have best due-diligence processes, high standards of preparation as well as high credibility. What is obvious from the analysis of Indian Healthcare IPOs is that high growth and high potential growth is a key factor for an IPO. Unless, you have a resilient and predictable growth plan to secure market capitalization, it doesn’t make sense to get listed.

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