KIMS IPO: Low capital costs will boost bottomline

KIMS has achieved the highest revenue growth as compared to its peers during the period 2017-2020. While KIMS has grown at an average of 26 per cent, the competitors have grown at roughly half of that average

Krishna Institute of Medical Sciences Ltd (KIMS) is tapping the capital markets with its fresh issue for Rs200 crore and an offer for sale of 2,35,60,538 shares in a price band of Rs 815-825.The issue size at the top end of the price band would be Rs2,144 crore. The issue opens on Wednesday (June 16) and closes on Friday (June 18).

KIMS is the largest corporate healthcare group in Telangana and Andhra Pradesh having nine hospitals and 3,064 beds. The largest hospital owned by the group is the one in Secunderabad and is a 1,000 bedded hospital. It is the dominant player in the twin States and has a bed capacity which is 1.6 times of the next biggest. KIMS follows a model where the company focusses on affordable quality care across its hospitals. It also follows a model, in which doctors participate in the growth of the hospital by investing in the equity capital of the company. This is different than the ESOP's that many companies offer. KIMS has built capabilities across therapies and derives substantial revenues from cardiac sciences, neurosciences, gastro sciences, orthopaedics, renal sciences, interventional pulmonology and others. It is the regional leader in organ transplantation speciality. The hospital company offers a comprehensive range of services across 25 plus Speciality and Super Specialities using modern medical technology. The company is promoted by Dr B Bhaskara Rao Bollineni, a renowned cardiothoracic surgeon having over 27 years of experience.

KIMS has achieved the highest revenue growth as compared to its peers during the period 2017-2020. While KIMS has grown at an average of 26 per cent, the competitors have grown at roughly half of that average. Similarly, in terms of EBITDA, while KIMS in the same period has grown at 29 per cent, the peers have grown at less than half. Similar is the case in terms of ROCE (return on capital employed) which in case of KIMS is 22 per centand is just about double digit for the rest. Clearly numbers are in favour of KIMS.

KIMS believes in keeping capital costs low and that is one big reason for their better performance over the years. Their growth focuses on increasing clinical capabilities in existing hospitals and adding more beds in the existing hospitals which means less capex and more revenue. They are also focussing on growing in untapped markets of their home States of Telangana and Andhra Pradesh. In case of growing outside the State, it is in adjacent States and therefore the first expansion would be in Chennai and Bengaluru. The hospital sector has been tough on investors in recent years. There have been four companies which went public. They were Narayana Hrudayalaya, Shalby, HCG and Aster, Except Narayana which has seen appreciation, all the other three have incurred losses for investors. Under these circumstances it becomes a tough sector from an investor perspective that KIMS is entering. The issue size is big at Rs 2,144 crore and consists of an offer for sale of 2.30 crore shares which is roughly a little over 30 percent of the present issue. The company had earned an EPS of Rs 26.87 for the year ended March 2021. On a fully diluted basis, this EPS reduced to Rs 26.42. Based on this EPS, the PE ratio for the issue of KIMS is a price band of 30.86-31.23 times. When compared with the peer set mentioned by the company it is strictly not comparable. Three of the four entities mentioned are loss making in the year 2021 and hence the PE becomes infinite. The only one in the black is Apollo Hospitals which trades at a PE multiple of 101.39 times.

Based on the business model of KIMS, the share looks interesting and one could apply for the shares for gains over the medium term. While some listing pop maybe available, it would not be very significant. For example, even if one were to get Rs 70-90 on listing it would be just about 10 per cent based on the issue price of Rs 815-825.Invest if you have a medium to long term view on the share.

The author is the founder of Kejriwal Research and Investment Services, an advisory firm)