Costly treatment

PENNY WISE

Medical services provider, Wockhardt Hospitals plans to expand its hospital network and retire short term debt for which, it needs Rs 850 crore. Wockhardt Hospitals expects to raise around Rs 650 crore from the IPO. To partly fund its expansion, the company had earlier (in January 2007) raised Rs 150 crore from a pre-IPO placement to Citigroup Global Markets India and Bennett, Coleman and Co, who together own 6 per cent in the company (4 per cent post-IPO). To increase revenues and ramp up occupancy rates at its medical centres, the company is pinning its hopes on foreign patients, focus on super specialty hospitals (higher end clinical facilities) and reach.

Expansion

Wockhardt operates 15 hospitals in the country, of which, 10 are superspeciality centres located in major metros, while the rest are in smaller towns (regional hospitals) spread across the country. The 15 facilities have a combined capacity of 1,374 beds. Six of the 15 centres have been set up by the company (greenfield ventures), two each in Mumbai, Bangalore and Kolkata. The rest are running under a shared revenue or long-term lease (brownfield) model, with two hospitals each in Nagpur, Bangalore, Hyderabad and one each in Rajkot, Navi Mumbai, and Surat.

A greenfield venture entails setting up a new facility from scratch, while a brownfield one involves sprucing up an existing structure and operating it. The company has a presence in South, West and East of the country and plans to expand its network into the North by setting up one greenfield and four brownfield hospitals over the next two years.

In addition to its North foray, in 2008 and 2009, the company plans to build four greenfield facilities and enter into five brownfield ventures across the country. With the expansion, the company plans to scale up its current capacity of 1,374 beds to 1,957 beds by March, 2009 and further to 4,793 by FY10. The hospital network will stand doubled to 31.

Segment focus

The company is increasing its focus on the lifestyle diseases segment--cardiac, oncology and diabetes, which is expected to grow from Rs 23,000 crore in 2006 to Rs 57,000 crore by 2011, says the CRIS-INFAC Hospitals Review 2007. In addition to the cardiac surgery, Wockhardt's focus has been in higher revenue generating segments such as neurology, critical care and minimally invasive surgery, which helps in faster healing.

The company is pursuing a combination of greenfield as well as a brownfield strategy to expand its network. Setting up a medical facility is capital intensive and costs Rs 50 lakh per bed, while a brownfield facility comes at half that. Thus, a 200 bed greenfield facility will cost about Rs 100 crore. The company is tying up with smaller hospitals to expand its presence quickly and at lower costs. The company upgrades the equipment and facilities at the hospital and leases the property or offers a percentage of the topline to the existing promoters.

Medical tourism

According to the CRIS-INFAC Hospitals Review 2007, an estimated 2 lakh international patients visited India in 2006, up from 10,000 in 2000. The medical tourism market, as it is called, is estimated at Rs 1,300 crore in FY08 and expected to grow to Rs 7,800 crore by FY12, a CAGR of 55 per cent. The increase in patients from overseas is due to the cost advantage foreign nationals get for treatment undertaken here.

For example, the cost of an open heart surgery is about Rs 2 lakh in India, which is a fourth of the cost in developed countries. Currently, about 3 per cent of the turnover for Wockhardt comes from foreign nationals and, the company plans to increase this to 10 per cent by FY11.

To improve its share of this market, Wockhardt Hospitals wants to leverage on its relationship with Harvard Medical International (HMI) and Joint Commission International (JCI), to attract foreign customers. While HMI, a subsidiary of Harvard Medical School, helps it to design facilities and establish new clinical programmes, JCI is the largest accreditor of US healthcare centres.

Valuation

The worry for the company has been on the interest front, which has been doubling over the last three fiscals from Rs 5.7 crore in 2006 to Rs 23 crore, for nine months ended December 2007. The IPO proceeds should help the company retire part of its debt. While operating margins have been steady at around 16 per cent, net margins, which are at about 3 per cent, should thus improve.

Considering that the company earns an average revenue of Rs 50 lakh per bed per year for a super speciality hospital and Rs 25 lakh for a regional hospital, it should close FY09 with revenues at Rs 446 crore. 
 

VALUATION HURDLE
Rs crore	Enterprise Value (EV)	Beds	EV/Beds	EV/EBIDTA	P/E
Wockhardt (Rs 260/225)	3077/2713	1374	2.24/1.98	77/68	101/87
Apollo	2993	6952	0.43	19.95	26
Fortis	2199	2450	0.9	36.05	-

Despite expansions and thus lower occupancies, margins are expected to stabilise on the back of higher proportion of foreign patients, wherein the charges are significantly higher that those charged to local patients. Besides, the company believes that focus on lowering length of patient's stay, increase in occupancy rates and improvement in average income per bed, should help it to maintain margins.

With regards to IPO pricing, the carnage in the markets over the last month has forced Wockhardt to reduce the offer price by about 20 per cent. The current price band at the lower and upper end is Rs 225-260, compared with Rs 280-310 earlier, translating into a P/E of 87 and 100, respectively, based on FY09 earnings of Rs 2.57. Its competitor Apollo Hospitals, the country's largest listed healthcare provider, trades at 23 times its estimated FY09 earnings. 
 

SPECIALITY PUSH
	FY07	9MCY2007	FY08E	FY09E
Net Sales	236.70	259.90	345.00	446.00
Growth (%)	48.77	-	45.75	29.28
Operating profit	39.50	54.50	72.60	93.66
OPM (%)	16.69	20.97	21.04	21.00
Net profit	15.50	7.31	9.74	26.76
NPM (%)	6.55	2.81	2.82	6.00
EPS (Rs)	1.96	-	0.94	2.57

Analysts say that when an established player such as Apollo, which is five times Wockhardt's size (number of beds), has a stable revenue model and is available at an EV/EBIDTA of 20 times, why would you opt for a company, which is being offered at an EV/EBIDTA of 68 times and with a high execution risk? On the enterprise value (EV) to beds metric, while Fortis and Apollo are available at Rs 90 lakh and Rs 43 lakh, respectively, Wockhardt is available at Rs 1.98 crore, at the lower end of the price band.

With Wockhardt's business model and the demand for healthcare services on the upswing, growing the business would not be problem. However, with rapid expansion and lower occupancy rates over the next one year and entrenched competition, it will be difficult to improve margins significantly. Though healthcare services is a sunrise industry and long-term prospects are good, the pricing of the issue leaves little scope for appreciation for investors in the short-term.

Issue opened: January 31
Issue closes: February 5