Wockhardt Hospitals, Emaar MGF withdraw IPOs

Wockhardt Hospitals Ltd. decided not to proceed with its proposed initial public offering (IPO) due to lack of interest from all category of investors amid weak market sentiment. The decision not to proceed with the IPO was made in light of continued global and domestic market volatility and poor market sentiment and the resultant effect on the subscription levels in the primary market, Wockhardt Hospitals said. All refunds will be completed within 15 days of the issue closing Date, Feb 7. Wockhardt Hospitals also received a lukewarm response due to concerns on its high valuations vis-a-vis its listed peers like Apollo Hospitals and Fortis Healthcare. The issue appeared be doomed right from the start as the company slashed its price band on the eve of the IPO. Then, the IPO got delayed by one day due to lack of adequate regulatory approvals. Wockhardt Hospitals later extended the issue by to days, hoping to attract some subscriptions. But, despite all efforts on the part of the company's promoters, there were just no takers for the shares given its expensive pricing and tough market conditions.

A couple of other IPOs - Emaar MGF and SVEC Constructions - were also facing much difficulty in getting subscriptions. Emaar MGF cut its price band twice. First, from Rs610-690 per share to Rs540-630 a share, and then by trimmed the lower end of the price band by another Rs10, to Rs530 a share. The real estate firm also extended the time period of the public issue by five days to Feb. 11. It was initially slated to close on Feb. 7. Emaar MGF did receive better response, but eventually withdrew the issue on Friday, saying it will consider an IPO once the market stabilises. The company also said it will consider other funding options and that the failure of the IPO won't affect its proposed and current projects. Meanwhile, SVEC Constructions extended the time period for its public issue, till Feb. 13.

The events of the past couple of weeks in the primary market raises some serious questions. One, about the efficacy, transparency and fairness of the entire regulatory IPO process, especially for retail investors. Secondly, about the involvement of merchant bankers and promoters, some of who tend to demand valuations that are out of sync with market realities and pragmatism. Having said that, public memory is short, and a rising market all excesses are brushed under the carpet and people just go with the current trend. So, when the markets recover and start rallying again, we will once again have greedy promoters and their partners in crime - the i-bankers - to sell juicy stories to gullible investors.

Wockhardt Hospitals IPO Review

Investors can refrain from subscribing to the initial public offer of Wockhardt Hospitals being made at a price band of Rs 220-260 per share (revised).

Even at the revised offer price, the offer appears expensively valued vis-À-vis sector leader, Apollo Hospitals.

Wockhardt Hospitals is the fourth largest player in the Indian healthcare sector with a presence in western, southern and eastern India.

It plans to scale up its operations to 3,500 beds by 2010, from around 1,400 currently.

Wockhardt Hospitals focusses on tertiary care clinical areas such as cardiology and cardiac surgery, orthopaedics, neurology, urology, nephrology, critical care and minimally invasive surgery.

Wockhardt’s current earnings rely significantly on three out of its total of 15 facilities (one hospital in Mumbai and two in Bangalore contributed 69 per cent of income in nine months of FY-07).

Overall, the occupancy rates are at about 57 per cent; with occupancy at some of the facilities set up over the last couple of years yet to pick up to healthy levels.

With the company in a heavy investment phase, investors should expect lower profit realisations and relatively low return on capital in the initial years (7.5 per cent in nine months ended December 2007).

With the reduction in the size of this offer (from Rs 778 crore to Rs 652 crore at the higher end of price band) and aggressive plans to ramp up capacities over the next few years, further debt or equity offerings to raise more capital cannot be ruled out.

At end of December 2007, the company’s internal accruals stood at Rs 10 crore, which cannot make up for the shortfall.

Wockhardt Hospitals’ current earnings are relatively small; translating into per share earnings of Rs 0.9 (on post-offer equity base) for the nine months of FY2008 ended December 31, 2007.

It currently owns/operates 15 hospitals (1,400 beds), having invested Rs 370 crore in capex in recent years. Plans are afoot to add another 2,127 beds through six brownfield hospitals (operated/managed by company or group companies on long-term agreements with original infrastructure owners) by end-2008 and four greenfield (to be entirely built by company) by end-2009.

Two-thirds of the net IPO proceeds, after deducting issue expenses and corporate purposes, will be used to construct and expand these 10 hospitals.

The remaining sum may be used to prepay short-term loans. Such prepayment, if it materialises, could significantly reduce the high leverage in the balance-sheet (debt-equity ratio, including short-term debt, may be significantly reduced from 3.8 currently).
Performance

Wockhardt Hospitals’ network spans ten super-specialty and five regional specialty intensive care unit (ICU) hospitals with an 18 year track record and expertise in minimally invasive surgery (up to 10 per cent of surgical operations performed in FY07).

Wockhardt plans to leverage on these to reduce average length of stay (the turnaround time, which is crucial to realisations) and maintain revenues per bed of Rs 24 lakh per year.

Wockhardt’s strategy revolves around garnering in-patient revenues by focussing on areas such as secondary care and advanced tertiary care; both of which have strong growth prospects and potential for high margins. Personnel being critical to hospital business, attrition is a key risk.

However, Wockhardt Hospitals claims a 99 per cent retention rate (last 12 months) for its workforce of 160 full-time specialists. The attrition rate was 20 per cent for resident doctors.

With operating margins of 20.8 per cent in the last nine months, the company’s margins are among the highest in the listed hospital space.

The company’s ability to ramp up occupancy would be crucial to prospects, as it has greater dependence on its core in-patient business (75 per cent of revenues) for revenue than peers such as Apollo, which has a pharmacy and medical BPO business as well.)

Going forward, a higher reliance on brownfield expansion may provide some relief as brownfield hospitals are typically asset-light and allow a quicker payback period, provided occupancy rates are healthy. Litigation risks to seven of the present and proposed facilities also exist.
Valuation

The company’s valuation at an enterprise value (EV) multiple of about 44 times its estimated FY-08 EBITDA (earnings before interest, tax, depreciation and amortisation) appears expensive. Apollo Hospitals, with 7,000 beds under operation and a more diversified profile, commands an EV/EBITDA multiple of around 20 times on FY-08 earnings while Fortis Healthcare enjoys around 42 times.

While Apollo enjoys strong brand equity, Wockhardt Hospitals also enjoys reasonable recognition in regions where it has been in operation for more than 8-10 years.

Given that the company is foraying into Tier-II cities (Madgaon, Nasik, Ludhiana, Jabalpur, Bhavnagar) packaging and pricing may be more important than the brand.

Taking into account the long gestation period in the hospital business and prospects for steady, rather than spectacular growth in earnings, the asking price for the offer appears stiff. It also does not offer any comfort on execution-related risks.

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Wockhardt Hospitals IPO Analysis

Wockhardt Hospitals IPO Analysis

Wockhardt Hospitals

Wockhardt Hospitals

Wockhardt Hospitals IPO Analysis

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.