Results has a provision for goodwill cost and they say it will occur for the next 10 years. Will this not have a significant impact on the bottom line for next 10 years?
This Goodwill policy is not clear to me.
What is the total goodwill amount and where is it shown in the balance sheet.? Is it same as intangible asset or a part of it?
is this only write off or actual cash payment? If it is one time payment and capitalised as intangible asset, then it should be write off. ?
This quarter has 1.59 cr. Is this for the quarter or for the entire year and will it continue to be for each quarter or year?
Seeking clarification from any one who is a subject matter expert.
Goodwill is create to account for premium over the total asset cost on acquisition of bristlecone hospital.
For E.g if total asset of bristle cone might be only 100 CR. But Virinchi paid a premium of 116 CR to acquire it as it gets expertise and customers of bristlecone which is an intangible asset and cannot be shown in books.
So to account for the cost difference goodwill is created for 16cr. Now slowly this has to be written off, so to do this every year 1.59cr will be shown as cost and goodwill be reduced by equal amount. It is a non cash entry and doesn’t make any difference to actual profits.
This accounting treatment is no longer valid. A company is now required to do an Impairment Test of all Intangible Assets annually. If it finds that the value of the Intangible Asset has declined partially or completely, it has to write-off the declined value. Impairment Testing is done by evaluating whether the benefit that the Intangible Asset was providing to the Company, is likely to continue on an ongoing basis or not, and whether the quantum of the benefit will remain unchanged or decline.
It is incorrect to assume that write-off of Intangible Assets is a book entry similar to Depreciation and does not have any impact on Cash profits. When an Intangible Asset is written off (i.e. Impaired) it usually means that the Company has lost the competitive advantage that the Intangible Asset was providing. So it will always have an adverse impact on future profit.
In the context of Virinchi taking over Bristlecone, how do we interpret the goodwill impairment?
Note no. 8 to audited accounts states that the Co has decided to impair goodwill over 10 years. The impairment of 2016-17 is Rs. 159 lacs, which is for the period 13 Dec.2016 (date of approval of merger of Bristlecone business) to 31st March 2017. Basic question : why did the management pay a premium for the Bristlecone business (which is what created the goodwill) and then decided to impair it? Acquisition at a premium is generally done for a long-lasting competitive advantage.
As per my understanding the book value of bristle cone was rs 26.87 per share, total shares outstanding was 1.5 MN. Which gives the book value of rs 4cr.
However the going price for bristlecone was determined to be 54 crores approx as the price is fair for a 200 bed hospital at 80% occupant with patients and doctors and all approvals in place. The goodwill is basically a premium for the above mentioned intangibles which cannot be shown in the books. The startergic advantage to Virinchi is obvious as they have all doctors in place and a good set of patients who can be referred to Virinchi, also patient history data is also available.
So the difference of 50crs has to be imapaired over 10yrs which I think is a fair calculation. As slowly the advantages gets diluted as Virinchi itself starts to be a reputation and advantage of its own.
This is basically to save taxes and generate higher cash flows. It is permissible under accounting standard. Many mergers have seen this kind of treatments, even with reputed companies.
Is goodwill write off permitted to save tax? or are you talking about MAT?
The promoters have increased their own shareholding by paying a premium to the hospital company. The debt has surged because of this. The promoters shareholding has gone up. Retail has come down, and debt has surged now. The interest expense is the real expense to be paid by the public shareholders for next many years.
I’m just a beginner. So i request the seniors to clarify …
As an investor in Virinchi… should i be bothered about standalone results or the consolidated? I mean ultimately, the EPS, P/E and other ratios should be based on Standalone or Consolidated?
Also, are the subsidiaries fully owned?
The Company claims to reach 250 beds shortly. Any idea how much it will cost to set up a 250 bed hospital in Bengaluru. Approx.
Depends on type of city and type of hospital . Can range from 50 lakhs to 1.5 crore if land and building is owned. If JV then as less as 30 lakhs (NH). So, the question is too generic to reply. There is a 200 page edelweiss report on healthcare , could give you all the specific numbers
Thanks for the report info. @manishinlucknow presently company is operating 200 beds at bristlecone + 350 beds at Virinchi, by h2 this year 150 more will be added and by next fin year 100 more beds will be added. All at Hyderabad.
Assuming 350 beds * 1 crore per bed and assuming the IT business and the bristlecone business being valued as zero, still, we are talking about a conservative valuation of 350 crore Market CAP for the entity.
I think the mkt should re-rate virinchi by April - may next year [ worst case scenario].
1 cr per bed is a standard thing? How did you arrive at that?
1 cr per bed is for tertiary care hospitals where most of these beds are used for high end surgeries like hip replacement, cardiac stenting, neuro surgery etc. The revenue per bed per day for these surgeries vs normal patients is like 5X difference. For a normal secondary care hospital, valutations are much much lower. depends on revenue and EBITDA per bed.
And these valuations matter only when another hosptial chain like Max acquires this hospital.
For a listed co, the only valuation metric is PE, ROCE, D/E and PEG ratios. - only these metrics are important unless you can sell these beds at this price!
Agreed. With no free cash flow generation and aggresive ramp up this company will need to raise capital to meet its financing requirement. Hyderabad is not an easy market to penetrate. All big hospitals are present in Banjara Hills with very well established doctors. A hospital that looks like a 5 star hotel will not attract patients - a good set of credible doctors will. I have been told that this facility is not being able to attract a lot of crowd despite giving heavy discounts.
Virinchi is a bet on the management. If you look into details , you will find a great set of people from backgrounds in technology, healthcare, data analytics and company management. The collective experience and knowledge of these people is much more than you or me can understand. They have already mentioned multiple times how they are trying to integrate big data analytics into healthcare.
You have to trust the management and believe that they will deliver the results and give them the time and patience to build up the hospital reputation. Without such attitude it is very difficult to have a long term investing mindset which will lead to value creation.
Till date I have not got any indication of dishonest behaviours from the management. We will have to wait and watch for the story to unfold.
You can also compare this to a start-up, where the initial setup costs and money required is huge however once capex is complete they would have a strong moat in hospital process management and analytics which will be difficult for other hospitals to replicate and implement.