Aster DM Healthcare Ltd IPO: Our View

Feb 12, 2018

In today's Insider, we look at the latest IPO that opens for subscription today - Aster DM Healthcare Ltd.

I'll take you through the key highlights of the IPO and my team's verdict on it. And if you'd like to go through the detailed report, you can view it here (no additional subscription required).

Issue Summary

Type: Fresh issue/ Offer for sale

Fresh Issue: 38.1 million shares

Offer for Sale: 13.4 million shares

Size: Rs 9.7-9.8 billion

Face Value: Rs 10 per share

Offer Price: Rs 180-190 per share

Key Promoters: Dr. Azad Moopen and Union Investments Pvt. Ltd

Minimum Subscription: Minimum - 78 shares and in multiples of 78 thereafter

Pre/Post Key Shareholders Holding (%): 59%/44%

Listing: BSE, NSE

Bid/Issue Opens: 12 Feb 2018

Bid/Issue closes: 15 Feb 2018

Company Background

Aster DM Healthcare is one of the largest private healthcare service providers which operate in multiple GCC states (Cooperation Council for the Arab States of the Gulf) based on numbers of hospitals and clinics.

The company currently operates in all of the GCC states, which comprises the United Arab Emirates, Oman, Saudi Arabia, Qatar, Kuwait and Bahrain, in Jordan, in India and the Philippines. The company's GCC operations are headquartered in Dubai, United Arab Emirates and Indian operations are headquartered in Kochi, Kerala.

The company operates in multiple segments of the healthcare industry, including hospitals, clinics and retail pharmacies and provides healthcare services through various brands "Aster", "Medcare" and "Access".

Further, the company commenced operations in 1987 as a single doctor clinic in Dubai established by founder, Dr. Azad Moopen. The company was incorporated in 2008 in a reorganisation to facilitate the growth of its operations, subsequent to which operations in the GCC states and India were consolidated.

The company had 149 operating facilities, including 10 hospitals with a total of 1,419 installed beds, as of 31 March 2013 and has expanded to 316 operating facilities, including 18 hospitals with a total of 4,651 installed beds, as of 31 March 2017.

Further, it entered into an operation and management services agreement with Rashtreeya Sikshana Samithi Trust in Bengaluru effective 25 February 2017 to provide operation and management services at a hospital in J P Nagar, Bengaluru. In August 2014, it launched Aster Medcity in Kochi, Kerala, a multi-speciality hospital with a 670-bed capacity, to be positioned as a destination for medical value travel.

Should You Apply for the IPO of Aster DM Healthcare Ltd?

Aster DM Healthcare Ltd is one of the largest private healthcare service providers operating in multiple GCC states (Cooperation Council for the Arab States of the Gulf) based on numbers of hospitals and clinics.

The company currently operates in all the GCC states, which comprises the United Arab Emirates, Oman, Saudi Arabia, Qatar, Kuwait and Bahrain, in Jordan, India and the Philippines. The company's GCC operations are headquartered in Dubai, while the United Arab Emirates and Indian operations are headquartered in Kochi, Kerala.

The company operates in multiple segments of the healthcare industry, including Hospitals, Clinics and Retail Pharmacies and provides healthcare services to patients across economic segments in several GCC states through their various brands 'Aster', 'Medcare' and 'Access'.

As of 30th September 2017, the company had 323 operating facilities, including 19 hospitals with a total of 4,754 installed beds.

The company is well diversified with its product portfolio including healthcare facilities, consisting of 9 hospitals, 90 clinics and 206 retail pharmacies in the GCC states, 10 multi-specialty hospitals and 7 clinics in India, and 1 clinic in the Philippines as of 30th September 2017.

A majority of company's hospitals and clinics provide secondary and tertiary healthcare services to patients. In addition to providing core medical, surgical and emergency services, some of the company's hospitals provide complex and advanced quaternary healthcare in various specialties, including Cardiology, Oncology, Radiology, Ophthalmology, Neurosciences, Paediatrics, Gastroenterology, Orthopaedics and Critical Care Services.

The company's human resources include 1,417 full time doctors, 5,797 nurses, 1,752 paramedics and 8,442 other employees (including pharmacists) and 891 free for service doctors. The execution capabilities of the company's experienced management team have enabled consistent growth in recent years, both organically and through strategic acquisitions.

Further, the company has various quality certifications and accreditations awarded for its high standard of clinical excellence.

Going forward, the company, to meet the increasing demand, is in the process of building or expanding 10 hospitals which are expected to add a total of approximately 1,727 beds.

Going by the above factors, growth for the company looks promising in the years ahead. That said, there also remain concerns on the flipside.

The company's net profit margins stand volatile and flat. Considering the consolidated numbers, the net profit margins in the preceding three years for the company ranged between 0.2% to 7%. Also, the company's earnings have been volatile.

Also, the company has generated negative cash flows during the fiscal years 2014 to 2017. This can impact their ability to retain high quality doctors as compensation package is crucial for retention of specialised doctors.

The company also is overdependent on Gulf States for its revenues. It derives 84% of its revenues from the Gulf States and any economic down-turn here can impact the operations of the company.

On the valuations part, too, the company looks expensive.

At the upper end of the price band, Aster DM Healthcare Ltd. is valued at a P/E multiple of 44.4 times. In our view, this is too expensive, considering the risks the company faces and low margin it earns. We believe the offer price does not provide sufficient margin of safety to investors.

All in all, while there are many positive factors that can aid the company's growth going forward, slim margins coupled with high revenue concentration and high valuations makes the company less appealing. We, hence, recommend subscribers to consider AVOIDING this issue.

For a detailed analysis of the IPO, click here (no additional subscription required).

Before considering acting on any recommendation, we suggest that you consult with your investment advisor with regard to your individual situation.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Don't forget to check your inbox this Wednesday, because I hear there is an incomparable offer in the works... It's our best service at its best price...keep an eye out.

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