Kovai Medical Center and Hospital - Health and Wealth

Latest shareholding pattern for June 18 is out and as expected Auburn Ltd. has increased its stake to 1.80% holding close to 2 lac shares. I think they have panicked after the steep fall post results and change of auditor and stopped buying for now. They are likely to resume aggressive buying once performance picks up and noise dies down. One inactive NRI promoter shareholder has exited and consequently there is a small decrease in Promoter holding.

The 100% demat of Promoter holding is one step close with just one promoter shareholder holding 101 shares in physical. Seeing this auspicious number of 101 I think this must be a really old promoter probably a signatory to the MOA. The scrip should be out of T2T once these 101 shares are converted to demat. Hopefully next quarter.

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There is a sharp drops in numbers of accumulated depreciation from March 2017 onward, is it an error from Screenerā€™s side or else? I canā€™t figure it out, kindly throw some on light on it. Thanks.

Reading of Annual Report may throw more light.

However, it seems due to adoption on IndAS where carrying value of fixed assets, i.e. gross block less accumulated depreciation is taken as gross block as on 1.4.2016 and hence Accumulated Depreciation became 0 on 1.4.2016 and March 2017 figure consist mainly of current year depreciation only.

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Yes, I got it Sir. They didnā€™t mention clearly in AR but from Googling I found an article @ https://taxguru.in/finance/ind-as-101-faq-on-deemed-cost-of-property-plant-equipment.html which mention the information exactly same which you stated here. Thanks for improving me sir.

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Yep. KMCH can improve the design and presentation of its Annual Report a lot. Itā€™s as if theyā€™ve done the bare minimum and then gave up.

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Company is building a 700 bedded medical college teaching hospital with an annual intake of 150 students for 600 Cr.
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Source: 2017-18 Annual Report.

I am confused about the term ā€˜teaching hospitalā€™. It is a medical college or a hospital or both? Perhaps both. But they already have a hospital at the same location so are they adding 700 new beds? It appears to be the case.
If they are spending 600 Cr only for the college then its too expensive. Assuming peak student population of 600 (150 per year x 4 years), capital exp per student works out to be 1 cr. Assuming 15% cost of capital, capital cost itself woks out to to be 15 lakh per student per year. Total tuition cost will be more than double this. That sounds too expensive. I know medical education is expensive but this is way too much in a non-metro location.
That means 600 cr capex s likely to include 700 new beds. Cost of building a hospital is around 0.7 cr per bed including land cost. Excluding that (since KMCH already has the land), it will ~0.5 cr per bed. So the 700 beds will cost around 350-400 cr and remaining can be for college. With this assumption (of 700 new beds) numbers look realistic.

So this capex looks more like an expansion of the hospital and medical college as a way to get there. Last year they had filed an environment clearance for hospital expansion so expansion was being planned as late as last year. In the context of hospital expansion and current valuation, this stock looks attractive although debt levels could go up for some time.

Disc: No position but interested.

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I think I could drop a few pointers.

  1. My friends in Coimbatore say that the hospital is so massive that they have little space to expand in the front. So theyā€™re expanding towards the back end of the hospital. So yes, this could be the place where the new ā€œteaching collegeā€ could come up. Interestingly, one of my friends likened the hospital to a railway station (Iā€™m not kidding).

  2. Based on my interactions with my MBBS friends, itā€™s normal for Medical Colleges to be adjacent to a hospital. The students learn better that way. Interestingly, all of them said theyā€™d applied to KMCH for a job once they graduated, but declined the final offer citing low salary. An area for concern, maybe?

  3. I think itā€™s too early to predict the sucess or failure of the college venture. What I really like and what finally pushed me to buy KMCH was their ability to take the risk when an opportunity presented itself (Medical Board lossening rules around Private Hospitals building Medical Colleges). In the age of businesses being dumb with excess cash, I think their focus of expanding within their own Circle of Competence is endearing.

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Just to add to the above. The current land usage is 20 acres of the 27 acres they have at this prime location. The unused portion of 7 acres is what I suppose is being used for the expansion. Never heard of a Medical College, that too in a Tier 2 city, with 700 beds. All they need for a college is probably 100-150 at most. I suppose this can be termed as ā€œexpansion by stealth.ā€

Would have loved to attend the AGM to get some clarification but out of town during that time. Hopefully, people who attend will update on the same.

I agree 100% to the comment about being as crowded as a railway station. Iā€™m not complaining thoughā€¦coz most of the people were there to avail hospital services than loitering around. They have been able to maintain the cleanliness despite such a heavy footfall which is good!

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Yes. I think many people are confused that the whole capex is towards the medical collegeā€¦which doesnā€™t seem right. I think like mentioned by you, probably 500 Cr should be towards the expansion i.eā€¦ doubling of the bed capacity and rest towards medical college.

I also feel that the medical college would be a good step for the hospital as they already have a huge experience and infrastructure. So lot of students would like to join (if they can get good faculty) and later the hospital would get captive resources.

It would be great if someone can attend the AGM and get clarity.

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It already has a hospital, now they will build a medical college attached to the hospitalā€¦usually the hospital and college will be very close byā€¦infact in the medical college i read and few where i have worked, college is a part of hospitalā€¦ Student attend the theory classes in the college building but the practical and clinics will be in the hospitalā€¦Teaching hospital means the hospital will now be attached to college blockā€¦
Also in medical colleges some patients will get most of the treatment at a very cheap cost and these patients will be examined by under graduates and operated or treated by post graduates under the supervision of established doctorsā€¦these beds which are reserved for the patients who are admitted fr students benefit will form a part of teaching hospitalā€¦does not hold good for every medical collegeā€¦but some well established colleges do this for training the post and under graduates.Also most of the medical colleges built usually cost around 400- 600 cr depending on the real estate demand of that particular areaā€¦it is a normā€¦The revenue of any medical college will skyrocket once they start taking post graduates ā€¦They will get permission to start post graduation once the first batch of students finish their internship which is around 5.5yearsā€¦ They need to clear mci inspection before that ā€¦so give or take around 6-7 yearsā€¦
Also many medical colleges will double their under graduate intake once mci accepts that the college has sufficient infra to accomodate more than 150 studentsā€¦many colleges start with intake of 100 then increase it to 150ā€¦ But starting with 150 from the beginning can be accomplished only by elite institutes who are very sure about their infrastructureā€¦in all probability the intake for under graduates may increase upto 250 per yearā€¦

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Flattish YoY Q1 results. 7% increase in Revenues, but only a 1.2% increase in PAT/EPS.

I can see the reason being a sharp increase and Medical Equipments consumed and Other Expenses.

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Out of T2T from August 23!! A little earlier than expected but long overdue. Hopefully, some trader interest will emerge and there will be a re-rating of sorts. Fingers crossed.

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KKR buys an almost 50% stake in Max India hospitals for $293 million. With a capacity of 2,500 beds valuation comes to around Rs 1.65 crs per bed give or take a few lacs. These are loss making beds for many many quarters in a row.

Considering the high profitability of the beds in KMCH one can at least rest assured that the steep slide in its price, albeit on very thin volumes, does not reflect the fair value of its assets. It reflect lack of trader and investor interest in illiquid shares. I was hoping that moving out of T2T might help but looks like that has had zero impact!!

Idhayam merged with KMCH (Finally):

Very few hospitals have shown a better growth trajectory than Kovai.The growth has come with ever improving BS. Do you think that growth has flattened or there is some thing in the busines that may create growth opportunities.

Well, the Medical College for one is a good opportunity. But it remains to be seen whatā€™s the collegeā€™s business model is and how to they intend to operate it. More of my views on KMCH here:

Medical college will always be the cash cowā€¦
Itā€™s business model is one which has high operating leverage. Fixed amount of staff pay them from the money given by students rest directly goes into ur bottom lineā€¦ U donā€™t have to recruit additional staff coz medical council of India has regulated that each Dept shud have this many staffsā€¦ So there is no compulsion to hire moreā€¦
The disadvantage of op leveraged business is that if the revenue falls below cut off point or break even levels then bottom line becomes negativeā€¦
But the moats all the medical colleges in India so far have is: revenue will never declineā€¦
Basically here revenue is number of students letā€™s say 100 and the fees they payā€¦
If each student pays 100 RSā€¦ Then revenue will be 100*100= 10,000/-.
So coming back to the moatā€¦
Never have medical college seats left vacantā€¦
Because I am in this fieldā€¦ Every single time every seat in undergraduate and post graduate seats fill upā€¦ If the student has to leave in between he/she has to pay the entire course fees and then leaveā€¦ If by any chance the student who took seat did not join then the seat will get back in the second or casual round vacancies during neet counsellingā€¦
So revenue is stableā€¦
Second thing fees keeps getting revised every single year or twoā€¦
It wonā€™t get under revised at allā€¦
So revenue keeps increasingā€¦
Downside is just wonā€™t see significant jump in revenues. Because the seats are usually fixedā€¦ Of course some colleges do go in for seat enhancementsā€¦ But again that has a capā€¦ But whenever they go for enhancement be rest assured the enhancement is significantā€¦ Not by 5-10% but by 50-100%ā€¦ Colleges with 100 will go for 150 or 200 seatsā€¦ Never for 110 to 115 seatsā€¦ Because of the hike in students there is no necessity that college has to hike the payment of staff ā€¦ So profit keeps going upā€¦
Risk factors: time and again MCI will come for inspection, so if the college fails on certain parameters they will be asked to stop the intake in worst of worst scenariosā€¦ So u need to lobbyā€¦ I hope u got the driftā€¦ And if the college is prompt enough to rectify the defect then they will get back the rights to admit the studentsā€¦ All these are small glitchesā€¦ But they are in worst of worst scenarios and in colleges who canā€™t maintain the standardsā€¦
But all in all medical college is the cash cowā€¦
Everyone wants to open a medical college not because of the hospital revenuesā€¦ But because of medical collegeā€¦
More like a Seeā€™s candy business , but with regulationsā€¦so cannot redeploy that cash and come up with numerous other medical collegesā€¦
But have no doubts about medical college revenue generating abilityā€¦
Also there are other factorsā€¦ Out of letā€™s say 100 seatsā€¦ Few go to merit students and usually 50 or more will go to management/NRI quota
ā€¦ Where the fees paid will be astronomicalā€¦ As high as 1 croreā€¦ Again depends from state to stateā€¦ Also management seat distribution varies from state to state also from college to collegeā€¦
In the end let me put it this way: every medical college has 2 wings - college and hospitalā€¦
Not all hospitals are profitable but all the colleges are profitableā€¦ In fact hospitals are opened because it is a pre requisite to medical collegeā€¦
If u can figure out a hospital which is profitable and they come up with a medical college then itā€™s a jackpot u have landed uponā€¦
PS: definitely not an analystā€¦ This is my personal opinionā€¦ I am not invested in kmchā€¦ Just gave my viewsā€¦ If anyone finds this post not adhering to the forums ethos feel free to take it outā€¦ Take my views with large spoon of saltā€¦

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To add to @Hao-mingā€™s points, the recently launched Ayushman Bharat scheme is a big positive for medical colleges. Earlier patient treatment was largely free but atleast now they will get some money for the patients they treat.

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At the current valuations and its previous track record of wise expansion, Iā€™m interested in KMCH. I believe its margin has slightly depleted due to additional costs incurred while constructing the college. So it is not really worrying me much.

By FY20, the company should realize the medical college business reasonably well and hence expecting a surge in revenues and profits over the next two years.

Disclosure: Not invested yet but considering

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Construction of the Medical College has begun.

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