Company Name – Krishna Institute of Medical Sciences Limited (KIMS) Current Share Price – INR 1,204 (August 30, 2022) Market Cap – INR 9,633 cr |
1. What is interesting about the stock?
Founded by Dr. Bhaskar Rao, a renowned cardiothoracic surgeon, KIMS operates a chain of multispecialty hospitals in Andhra Pradesh and Telangana, with a focus on tertiary and quaternary healthcare. It began its journey with a 300-bed hospital in Secunderabad. Today, KIMS is one of India's leading multi-disciplinary integrated private healthcare service providers offering comprehensive healthcare services across specialties and super specialties.
The flagship hospital of the Company in Secunderabad has a capacity of 1,000 beds. Spread across eight cities in the states of Andhra Pradesh and Telangana, KIMS has a total bed capacity of ~3,600 beds and an established presence in the southern part of India.
KIMS’ first hospital in the network was established in Nellore in 2000 and subsequently, the company added 4 more hospitals in Rajahmundry, Secunderabad, Srikakulam, and Kondapur by 2014. These 5 hospitals are mature hospitals for KIMS, with the Secunderabad being the flagship hospital for the company. Secunderabad hospital accounted for ~50% and ~60% of KIMS’ overall revenue and EBITDA in FY22.
KIMS has also significantly expanded its hospital network in recent years through its acquisition of hospitals in Ongole in FY17, Vizag and Anantapur in FY19, and Kurnool in FY20. Given these were operating with EBITDA losses at the time of acquisition, KIMS was able to acquire these 4 hospitals at relatively cheap valuations of INR 27 – 30 lakh EV per bed vs. greenfield capex of usually INR 50-60 lakh per bed (excluding land cost) for hospitals in tier 2/3 markets.
At present, Dr. Bhaskar Rao and his associates have a 38.8% stake in KIMS, General Atlantic Partners, a PE fund, holds 17%, and the balance is held by institutional investors and the general public, including doctors. In June 2018, General Atlantic Partners invested over USD 130 million, in a combination of primary capital and secondary purchases, to acquire a significant minority stake of 42.6% in KIMS. This included the takeover of a 30% stake from India Advantage Fund, India's largest private equity fund managed by ICICI Ventures. General Atlantic sold part of its stake (18%) in the IPO with the remaining stake being diluted due to primary issuance in the IPO.
In October 2021, KIMS has also announced the acquisition of Sarvejana Healthcare Private Limited (part of Sunshine hospital group), which is expected to result in KIMS having a total of 12 hospitals, across 9 cities with more than ~3,600 beds. KIMS recently entered into a definitive agreement to acquire a 51% stake in Kingsway Hospital Nagpur which has more than 300 beds.
Future Prospects
KIMS intends to drive growth in its existing hospitals by further deepening its specialty mix beyond its key specialties of cardiac, neuro, renal, ortho, and gastric. KIMS will look to add organ transplantation, oncology, and mother & child care specialties across most of its hospitals. Given that KIMS has operationalized only ~3,200 beds out of its existing capacity of ~3,600 beds (including Sunshine), the company has the opportunity to operationalize ~13% incremental beds from its existing capacities.
KIMS is also targeting to expand its hospital network into newer, adjacent markets of Karnataka (Bangalore), Tamil Nadu (Chennai), and Maharashtra (Mumbai) through greenfield hospitals in these markets.
Management Background
Dr. Bhaskar Rao is the founder of KIMS and is one of the very few Cardio-Thoracic Surgeons in the country, who has performed over 30,000 surgeries in his career spanning the last 25 years. Dr. Rao started his career in 1990, before turning into a healthcare entrepreneur. He started his entrepreneurial journey at "Mahavir Cardio Vascular Centre" in 1996 in Hyderabad with 50 beds.
Strengths (Why invest in KIMS?)
Established market position
Cluster approach and experience of turning around acquisitions in Tier 2/3 cities
Higher occupancy (80% in FY22; 66% in Q1FY23) – leading to higher ROE/ROCE vs competition
Affordable pricing (APROB at ~ INR 25,000/30,000 vs competition at more than INR 35,000)
Doctor equity model – reduces attrition and lowers doctor cost
Healthy financial position – strong cash flow generation and net debt close to zero
Weakness
Geographic concentration
Highly competitive industry with national players trying to take away a market share of regional players
2. Key Historical Financials
Unlike most of hospital chains, KIMS didn’t see a fall in revenue in FY21. Hospital chain had strong revenue growth of 24% in FY22 on a YoY basis. However, the growth rate has come down in Q1FY23
EBITDA margin has expanded from FY18 – driven by the turnaround of the acquired hospitals. Margin contracted in Q1FY23
Cash Flow Convertibility (CFO/EBITDA) has deteriorated in FY22
ROE and ROCE are more than 30% - exceptional as compared to the competition
Cash Flow Analysis
Working capital in the business is low. I would expect Company to have an EBITDA of INR 500+ cr and most of this gets converted into cash flow from operations (CFO), enough to fund the growth plans.
3. What is my view on company valuation?
The Company did its IPO in July 2021 at a share price of INR 825. It got listed at a 20%+ premium.
KIMS trades at an EV/EBITDA ratio of 18x vs Apollo Hospitals of 29x and Narayana Hrudayalaya at 20x. Valuation looks reasonable vs competition as the Company has better ROE/ROCE levels. Growth could be the only challenge for KIMS which they are trying to address using acquisitions. How would that play out - only time will tell !
General Atlantic Partners (PE fund) owns a 17% stake in the Company, and any stock market exit for them could create an overhang. However, they might also exit alongside the Promoter in a strategic sale to a national chain or an international player.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Any surge in COVID-19 can lead to deferment of elective surgeries impacting business
Adverse government regulations
Limited availability of medical staff – could lead to an increase in cost pressure for quality resources
About the Author
I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.