Dr Agarwal’s Health Care IPO Review: Visible Growth But at a High Cost

Dr Agarwal’s Health Care IPO Review: Visible Growth But at a High Cost

Dr Agarwal’s Health Care Ltd – AHCL, an eye healthcare player, has come out with its IPO and is open till January 31. Total issue size is ₹3,027 crore, of which ₹300 crore is fresh issue and the rest is offer for sale. The IPO is valued at 102 times H1FY25 annualised EPS when adjusted for intangible amortisation charges (160 times unadjusted). This is a premium to the already-high-PE healthcare industry. The growth prospects of the company have been strong and expected to continue similarly, driven by capacity expansion. But we recommend investors wait for clarity on a better cost structure that allows a higher flow through from EBITDA to PAT before investing. Currently, the 25-26 per cent EBITDA margin dwindles to 7 per cent PAT margin due to line items pertaining to interest costs related to deferred payments on acquired businesses, amortisation and tax (currently at 34 per cent, which can reduce to 25 per cent). These can normalise post IPO, but investors need to wait for more clarity on these to arrive at a reasonable valuation for the shares.

AHCL is the parent organisation of the long-time listed Dr Agarwal’s Eye Hospital (AEHL) and holds71.9 per cent of the company.

Industry tailwinds

The healthcare industry benefits from the rising income levels in India and access to institutional healthcare services. The insurance penetration has improved to 38 per cent with the introduction of PM-Jan Arogya Yojana, which further improves the financial ability to access healthcare. The scope for eye-related healthcare has further tailwinds. The higher population of the elderly, thanks to improved life expectancies, is susceptible to eye-related ailments. That India has a higher-than-average prevalence of diabetes, which affects eye health, is another factor.

Hospitals and healthcare delivery markets have grown at 9-11 per cent in the last four years and are expected to sustain the momentum, according to Crisil in the RHP report. Within this, the eyecare market is expected to deliver 200 bps additional growth.

A large portion of eye healthcare is also a low impact cost procedure. A cataract procedure, a mainstay procedure in eye health, can start from ₹25,000. This should imply two factors. Firstly, the scope for organised players should increase from the current 13-per cent levels, as per the RHP. This is because eye healthcare is a volume-focussed play and the ability to handle volumes is built on personnel, infrastructure, equipment and management skills which can be provided by organised players. Secondly, the low cost but high benefit from eye healthcare and rising income and insurance combination makes this segment the front line for improved healthcare penetration.

Growth drivers

AHCL reported revenue CAGR of 38 per cent between FY22 and FY24. The foremost driver was facility addition at 30 per cent CAGR — from 106 facilities in FY22 to 209 now. The company has added 29/44/30 facilities in H1FY25/FY24/FY23. Organic and inorganic expansion have played a part with the company reporting 7/16/21 additions through the inorganic route in the same periods.

An improving asset utilisation will be another driver in the future, while it is impediment now. The current emerging facility (less than three years of operations) to mature facility (more than three years) mix is 56-44 per cent. As this improves with aging of facilities and a larger base of mature facilities, the asset utilisation will improve, which is another driver to earnings growth. For instance, patients per facility declined 13 per cent in H1FY25 owing to larger base of emerging facilities. This can improve going forward, as the management streamlines the newly-acquired/built facilities.

In the same period, realisation per surgery improved at 5.5 per cent CAGR. This is driven by normal price hikes amounting to 2-3 per cent and higher mix of high-cost surgeries including refractory surgeries and higher cost cataract surgeries.

In the medium term, AHCL can drive facility addition in a similar manner. The fresh issue proceeds of ₹300 crore is allocated for debt payment (₹195 crore), which should make it cash positive and the rest allocated to capex and general corporate purposes. The company expects to sustain primary (touch points) facility costing ₹30-40 lakh and secondary facility (upto surgical capability) costing ₹4.5-7 crore addition similar to FY24 addition of 44 facilities. This could imply 22/53 per cent revenue/PAT CAGR in FY24-26 if the company is able to identify, acquire and streamline assets in similar manner.

At 102 times earnings, which have been adjusted for intangible amortisation, the offering is at a premium. The 25-26 per cent EBITDA margin dwindles to 7 per cent PAT margin due to line items pertaining to interest, amortisation and tax. As the company resolves these in the post-IPO period, a better clarity on right valuation for AHCL shares can emerge for the growth the company can deliver. Investors can wait and watch for now.



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