KMCH New Capex IRR Calculation (Key Assumptions):
- Extra 700 Beds will contribute at least 200 Crores in Revenue. This is a conservative assumption. Hospital EBIT will grow at 18% over 20 years (Historical is about 20-23%).
- Medical College will contribute at least 12 Crores in EBIT. Again, a conservative estimate, because we still do not know what are the additional streams of income from this business. This will grow at 20% over 5 years. Then PG fees of at least Rs. 50 Crores gets added, but growth slows to 15% for the remaining 15 years.
- Maintanence Capex calculated from historical Depreciation/Gross Block (Depreciation is proxy for Maintanence Capex) at ~5%. Ignored last couple of years because of distortion from new Capex. Maintanence Capex will grow at 5% every year (Inflation).
- Interest Paid calculated from historical numbers at 8.81%.
- Debt repaid in equal installments 5-6 years from now.
- Taxation at 25%.
KMCH New Capex IRR:
KMCH IRR Calculation.xlsx (27.7 KB)
(For initial few years of negative IRR, I have put in some fillers for better pictorial representation - ignore them. Just look at IRR from when it turns positive)
I have done this just for about 20 years of operation. But clearly, assets like a Hospital last very, very long - far beyond just 20 years. With just a small investment in Maintanence Capex, a lot of Cashflows can be extracted. In fact, if you just continue this exercise for even 1-2 years more, IRR jumps even further - which we otherwise call “Operating Leverage”. But of course, nobody knows what will happen to the business environment over a long period like 20 years and that is exactly the risk we take as investors.