Virinchi... A bet not to be missed

(Sujay Ghosh) #90

(Gorthi) #91

My simple questions here…why are you guys telling 2.5 or 3 Cr per bed and arriving huge market cap. While purchasing Bristol they paid 54 cr for 200 bed hospitals that means 25 lacs each bed… That itself seems to be too high( as they created approx 50 cr good will to observe that)…
Is it not the right way to value this company rather than otherway round??
Views from others welcome…

(Gorthi) #92

S No Company No of Beds M Cap* Per bed Cost (cr)
1 Apollo 10,000 14,861 1.49
2 Indraprsahta 718 484 0.67
3 Virinchi ** 550 207 0.38
4 Kovai 1,000 1,358 1.36
5 Forties 4,000 7,528 1.88
6 Narayana 5,441 6,030 1.11

*As on 19th Aug
**350 Beds- Virinchi, 200 Beds- Acquired from Bristle, 150 beds will be commissioned by Q2’18, 100 beds will be commissioned by Apr’18( considered only 550 beds)
Source: Latest available AR

As per the above calculations Virinchi has least cost per bed i.e 0.38 cr. With these calculations it appears to be bargain compare to peers.

Views from others welcomed.

Dis: Not invested.

(Cshar) #93

Need to watch in next 2-3 quarters how hospital is faring on revenue front. Overall review for Virinchi Hospital is Hyderabad is above average. You are getting IT business at zero valuation or hospital business at zero valuation or vica versa. Current price is very good to enter & hold for longer term. Added more quantities lower levels. Trigger for buying Virinchi is that hospital business in India can’t fail however there might be shrinkage in margins across sector due to government putting lot of regulations on pricing frony which I support from heart though as a business hospital will suffer.

(Vivek Mashrani, CFA) #94

Business Model:

IT company + Multi-specialty Hospitals business; Based out of Hyderabad with offices in US
IT company has annuity based products and support services and stable free cash flow generation
Started hospital in 2016 (350 Beds) and merged promoter led 200 bed hospital (BCH)

Skin in the game:

Promoter increased its stake from ~27% to ~50% after merging its hospital

Strong points:

IIT-IIM Alumni Management
11 acres campus at Hakimpet Hyderabad at book value on Balance sheet (~50-80 Cr in Land value)
Annuity based IT business provides stable FCF
350,000 sq. ft. hospital at Banjara Hills
Expanding RoE and RoCE

BCH received NABH accreditation in July 2017

Awarded “Best in revenue IT SME” for 2015-16 by Telangana Government

Awarded “Best Indian IT SME” for 2015-16 by Hyderabad Software Enterprise Association based on actual export and FX data

Awarded “Emerging Hospital of the year in Multi-specialty category” in Feb-2017

Key triggers:

Break-even from 350 Bed hospital expected in Sep-17 as per discussion with management; Current beds: 350+200 = 550
Additional 150 beds expected to be added in Q2-2017; 100 beds by April 2018
To set-up 6 new hospitals across India at later stage
Valuation gap: Generally hospitals are valued at 1-2 Cr EV/Bed vs. Virinchi has 550 beds and EV of ~350-400 Cr (This includes IT business and properties of the company)

Disclosure: Invested

(Vijayk) #95

Stock had run up a lot more than justified by fundamentals. Coming back to ground now

(Vivek Mashrani, CFA) #96

Virinchi report very good set of numbers for June’2017 results:

Consolidated revenue vs June’16: Up by 51% at ~84 Cr. vs. 55 Cr.; PBT: up by 77% at 9.6 Cr vs. 5.4 Cr.
PAT: up by 73% at 7 Cr vs. 4 Cr

Good thing is hospital segment has break-even and has turned profitable now.

Healthcare services segment revenue (on standalore reporting basis): 8.33 Cr and operating profit of 1.63 Cr.

Disclosure: Invested

(J2EE Professional) #97

The numbers prima facie are pretty good. Here are the results. With the consolidated EPS of 2.62rs for the quarter, the stock looks very attractive.

(Vijayk) #98

We should be looking numbers post equity dilution. PAT up 73% BUT how much is the growth in EPS?
How much is the growth in revenue per share?
A meager 18% growth in EPS after the company has loaded lots of debt!

(Vivek Mashrani, CFA) #99

Agree. In that sense we should look hospital business as 3-year breakeven business which it has done in very early stage. When hospital business will increase capacity utilization and start generating benefits of operating leverage you will see incremental growth.

Also, debt is priced-in in the PE multiple. On EV/EBIDTA basis this is looking quite cheap compared to its peer hospitals in early stage.

(Vijayk) #100

Hospital is a fixed cost business low ROCE business. Many hospitals in India are not doing well actually.
The one who are doing well are led by very strong doctors like Dr. Shetty, Dr. Trehan etc.
Also note that govt has recently clamped down on knee prosthesis price in addition to stent.
This used to be money spinner for hospitals.
It isn’t an easy business where you are assured of profitabiliy

(Vivek Mashrani, CFA) #101

True, if one doesn’t like hospital business they should not invest in this sector.

(J2EE Professional) #102

these clampdowns can be seen both ways. If it can dent the margins of hospitals and it can also increase the volume as affordability is increased. For newer hospitals this is definitely positive.

Also, 18% EPS growth is good. There is 150 basis points improvement in EBITA margins and this just cannot be ignored. As the hospital business stabilizes, things are only going to improve.

(Vijayk) #103

at full capacity utilization hospitals are earning less than 20% ROCE. Apollo hospitals earns more than half of cash flows from its pharmacy business. Hospital business is like a hotel business- heavy capex, low ROCE, low margins. And losses in some cases even if it is a mature hospital/hotel

(Vijayk) #104

Another point to note, is the issue of growth. Once hospital reaches its optimal utilization levels- Growth drops to a big Zero. A big hospital can’t grow its profits like other businesses do because it will require to set up another big hospital.

(J2EE Professional) #105

why wouldnt there be no growth? There are still 150 beds to be added in this FY and further, more in next two FYs. Also, growth in hospital business comes by adding new lines of revenues (and price increases - though not counting it right now). It completely false to say there is no growth in hospital business. Kindly do tell, which hospital is running into losses?

Virinchi is still in the growth phase and when the day comes that it is on full capacity utilization, it wont be available at 200cr market cap.

(Vijayk) #106

I clearly mentioned- after reaching the optimal utilization level- growth comes to a standstill.
You are getting aggressive here
Many standalone hospitals including many of big chains are in losses.
You can talk to any industry expert for the same.
And, why aren’t you talking of enterprise value, why market cap?
For a business with debt- it is the EV which matters.
Otherwise no harm in buying JPA or PSU banks

(J2EE Professional) #107

not sure why you felt i am getting aggressive, but i do have two of my family relatives having small hospitals and i have only seen them grow. I have also not seen any listed player in losses and that’s why i asked you. And i dont think anyone is a better industry expert than people who actually own hospitals.

For a business with debt, EV is not the only tool and in my view EV is already flawed but fine, if someone likes it - no issues with that. But even with that enterprise value of virinchi is nothing. Also, If someone is obsessed with EV value then replacement value could also be considered.

I hope others also pitch in.

By the way you are forgetting the other cash accruing business of virinchi.

(Vijayk) #108

Huge difference between small family owned hospitals and big hospitals- Doctors!
Latest rumor in the industry is Medanta is not doing well because top doctors have started leaving the place.

But- a family run small hospital is typically run by husband and wife- both doctors and later kids join in as doctors too.
They are the owners, adminstrators and the key doctors as well. Their profit is their salary.

In a big hospital, you have to pay top dollar to top doctors- and even then the competition poaches them at even higher price. Trehan had given top doctors- an Audi each. Latest I heard is Jaguars. Even, then the doctors are leaving.

Small hospitals run by oweners who are themselves doctors are not comparable to hospitals where the key resource- doctors is a big issue.

And, yes some hospitals of big chains including Max, Fortis are in losses. Standalone hospitals- many are in losses, Not sure of Apollo

Anyone can build a building and put some MRI, CT scan etc. What matters is the doctors!

(J2EE Professional) #109

then by your definition, those are not small hospitals. They have a fleet of 25 docs and three surgeons and one of them is a 110 bed hospital.

What you are saying is not confined to hospitals, poaching happens in every industry. Also, every hospital have different business model. Salary is not the only thing.

Let us see if markets in future believe virinchi would make money or not for investors. I am positive as i see good EPS growth, improving margins and people who are obsessed with hospitals business, totally forgetting there are other cash generating businesses as well.