Hi Nooresh,
Yes, they do have a medical college but thats in a different entity, which is a charitable trust. In a way, I see it as a very good thing.
I don’t think promoters of Kovai are more into charity…they seem to be running the hospital like a good business too. They have some very good nos and ratios and if the recent margins can be sustained, I think the stock has value.
Yes, promoters are consistently increasing stake.
Hadn’t looked into PTL earlier…will take a look.
Ayush
Hi Ayush,
Thanks for a good write up.
On cash flows.
Even indraprastha medical has operating cash flows of 54 crores on a market cap of 304 crores with just 52 crores of debt.
Comparing EV/EBITDA of Kovai with indraprastha
What happenes when Kovai is fully operational? It’s cash flows/ EBITDA goes up and it’s debt goes down and ultimately we land up with another indraprastha.
Do you agree with with what I am thinking? Or you think that Kovai is a lot different?
Regards,
Hi Excel,
As you had raised queries on blog too and having already replied there. Not repeating the same here.
Ayush
Thanks for your reply Ayush
This is just a log entry
ValuePickr and theequitydesk are as well the best places to record one’s thoughts for future reference
I had some queries reading through the annual report:
Red flags:
Important -
)- Only 2 bankers - IOB and IB - Government banks - Generally am nervous if the company does not have any private reputed lenders
)- CARE rating agency - CRISIL or ICRA would have been better
)- Why is interest income just 75L whereas cash in books is 24-25 crores? 3% interest?
)- Very high purchases from related party - What is it? From whom? No clear explanation
Not so important:
)- Historically Very low dividend historically compared to CFOs - Not a big issue as such since they have to repay debt of late
)- Some director associated with Sakthi Sugars - Not a red flag as such - But Sakthi Sugars has done if not shady, stupid things like acquiring foreign auto ancillary companies and then writing off all that investment
)- Promoter has bought BMW in company money - “Hire Purchase loans from BMW India Financial Services Private Ltd” - Not beingjudgmentalbut could have bought in personal capacity
)- What is consultant charges in other expenses? - Payments made to doctors who are not employees?
)- Why is current tax so low but deferred tax so high? - When can this happen?
+ves:
)- Insider buying - Promoter has increased stake
)- The company has been generating high levels of cash and has started repaying debt too
)- Low salary levels of promoters
)- Good benefit from deferred tax liability
My primary concern is on reputation of promoters and their integrity. Anyone has any inside view on this? All the important red flags can be passed of if their personal integrity levels are high and there is comfort on that level.
Hi Excel,
Regrettably I’m not member of TED.
Could you please post your comments about Kovai on ValuePickr?
On the RPK’s point re tax and deferred tax, it could be because of large capex done recently. Kovai could be claiming depreciation allowance on rooms added.
Cheers,
Anil
Hi RPK,
Thanks for putting up your observations.
My thoughts on your concerns:
Yeah, the interest on cash should be looked into. I think it also means that this cash of about 25 Cr might not be there consistently on the B/S. It would be sort of liquidity needed to run day to day operations of the hospital. Otherwise they should have utilized the same to repay debts.
Related party transaction is there for purchases and if one looks carefully, it seems to be the amount for the hospital supplies and pharmacy. If yes, then I think its ok as the co is making very good money on pharmacy sales too.
Historically the co has had good dividend payout at above 20%. Its only last 3-4 yrs when they undertook major capex that the payout has been reduced to about 10%.
I think buying CAR is a normal thing and common for almost every co in India.
Deferred tax would be higher as they have undertaken a major CAPEX. Good part is that they seem to be doing proper provision for taxes.
Ayush
Buying a luxurious BMW for promoter using company money is an unethical move. Just because it is common does not make it right. My experience shows that in such cases there not just one cockroach in the cupboard. However, just this one aspect does not mar the prospects of an investment.
Thanks Ayush for the reply. I looked at the company in more detail. One thing which I could not understand is their low rate of interest cost for the debt which has helped a lot in increasing ROEs. I have used the average capital employed figures without deducting cash. Then for FY12, EBIT is 33.26 crores and CE is 280 crores (average FY11 and FY12) giving an ROCE of 12% whereas the ROE is 21.5% - The company has paid an interest of just 17 crores on average debt of 210 crores - This is long term debt and need to be on the books full year. If you look at the past also, their cost of debt since FY05 is very low. Using average debt figures it works out to 6-8% from FY05 to FY12 and using year end figures it works out to 5-7% which is extremely low. So while pre-tax ROCE is not killer, ROE is very good. I took the figures from the company annual reports.
Most likely the debt is not uniformly held throughout the year on the books, i.e. there are sudden spikes which can explain this but it is weird since debt is pretty high as a ratio of equity for quite sometime. Anything I am getting wrong in terms of calculation?
I checked with a source who had very high regards on the hospital. He did not know much about the promoter but told that they have not been involved in anything shady and have reasonably good standing in society.
But the CFO figures are mouth watering from a valuation perspective.
Hi RPK,
The co had undertaken the expansion in 2008 and the same has been done in 2-3 phases. With the last phase of opening of cancer block completed in about March, 12. Hence there might be capitalization of interest cost during these periods as per the accounting standards.
If we look at the latest Int cost, its about 7 Cr for each qtr (after March 12). Hence it would be 28 Cr for the year on a debt of about 200 Cr. Hence the int cost works out to be about 14% and seems ok.
Yes, CFO from operations is the interesting part for this co.
Ayush
Hi Ayush, RPK,
To say that the numbers are exciting is to state the obvious. Then why is the valuation so cheap? Is it due to single location and small size? Just look at the price differential relative to Apollo.
I think they will soon want to start a new location, which would need large equity infusion. At that point in time, having richly valued stock becomes important, if you want to limit the dilution for existing shareholders. Kovai seems to be a reclusive company without too much interaction with capital markets. Such companies have to dilute more than usual to meet their incremental capital requirements. In my opinion, this factor is working against the company’s valuation.
Would love to hear your comments.
Anil
hi ayush,
any view on the latest quarterly results.
regards,
hemant
**Kovai Medical Link: http://dalal-street.in/kovai-medical-centre/ **a The hospital hasdone pretty well Link: http://www.bseindia.com/xml-data/corpfiling/AttachHis/Kovai_Medical_Center_&_Hospital_Ltd_200513_Rst.pdf a delivering a 33% topline (turnonver) and 77% bottomline (net-profit) growth for FY13. Though our expectations for Q4 were more but nevertheless, the results are good. As the company hasnat announced any major expansion, the peak debt may be behind us and now the company might focus on reducing the outstanding loans. Given their excellent cash flows, if the debt and the interest cost reduces (currently interest cost is more than reported net profits) the company should be able to deliver good profitability growth for the upcoming year. The debt equity ratio has corrected from 3.40 in FY12 to 2.29 in FY13. At CMP of about 165, the 700 bed hospital is available at a market-cap of 170 odd crores. [Related interesting reading on150 bed Apollo expansion for Rs.120 crores Link: http://www.mydigitalfc.com/news/apollo-leases-lifeline%E2%80%99s-property-invest-rs-120-cr-hospital-619 ].
We feel the company is very interestingly placed and can deliver a good FY14
This stock is place under il-liquid category So is it wise to invest in such stocks where one might not be able to sell at future date when he wants to?
HI Ayush,
can you pls provide your opinion on Kovai after Q3 results? I Have some money it.
)- Sridhar
Comparing Kovai with Indraprastha Medical makes for a very interesting comparison. Indraprastha, an associate of Apollo hospitals (Apollo holds abt 25% stake) runs a couple of hospitals in Delhi & Noida. Other shareholders include HDFC & Tata Investment. The Co. is about twice the size of Kovai & should do about an impressive 30% ROCE for 13-14. The Co. is in the highest tax slab, debt levels are low, has a very high dividend payout ratio in the vicinity of 40%. At Rs. 1.60, the div yield comes to about 4.5%. Kovai, with a Debt equity ratio of 1.9 (171.79/90.13) has a much lower ROCE, but because of the same reason has a much higher ROE. It is debatable as to which is a preferred option, but I for one feel more comfortable with lower debt.
Hi Sridhar,
The nos look good…finally the effect of debt reduction has started getting visible on bottom line. On the topline I was expecting better growth and margins…but that hasn’t happened as per wishlist 
I continue to hold and have added some at these levels.
Regards,
Ayush
)- Sridhar
Hi,
There is no change in the fundamentals in this company so far. But technically it has consolidated around 150. With market momentum, expecting a good move in this as well pre/post results. Expecting good results. 1 YearForwardPE is at 5.
Disl: Invested. Views are biased.
Hi all,
This is my first post on this forum. I will post a bio in the introductions thread later.
I have invested in a few hospital stocks overseas and this one does look cheap on the face of it but there are a few reasons not to get carried away too, some thoughts for what it is worth:
1). A well run and profitable hospital is a good cash cow in the same way a good restaurant is however the business only become interesting if the model is scalable, a single hospital’s profitability is constrained by the number of outpatient turns /utilization of its beds (for e.g. optimal bed utilization is around 75% for Singapore hospitals). I could not find such metrics for this hospital in its AR, if anyone has them please do share.
2). To scale nationally one needs a good brand as locals generally tend to patronize well regarded local hospitals, Apollo to some extent has achieved this hence its high PEs. This can be a major stumbling block for hospitals and needs strong marketing muscle and cash.
2). Based on above points PE is not the best metric for valuing single non scalable hospitals so single digit PE might not necessarily mean cheap.
3). A good way to value such businesses in my view is through replacement cost and dividend yield. Their fixed assets are currently stated around 280 cr. in the books, can a similar hospital be constructed for this amount in a comparable area ? is it easy to get the number and quality of doctors this hospital has readily from the market? if the answer is no to both questions then this will likely become an attractive acquisition candidate for the major players at a good premium.
4). Hospital businesses with no intention of expanding aggressively would do well to return cash to shareholders in the form of dividends, (Religare hospitals has listed such a high dividend paying hospital trust in Singapore) that could boost valuations as yield investors buy the stock.
net net, I do think at a valuation of ~ 40k usd per bed, track record of profitability, good location and reputation the business certainly looks to offer value given the demand for high quality hospitals in India by global funds. I also agree with the views of Ayush and others that reducing debt over the coming qtrs will give a good boost to profits.
For this one to be re-rated though the mgmt has to come clean on its future plans on expansion and how it plans to create value for shareholders. The AR also needs to be more transparent on operational metrics of the hospitals.
Would be great to meet the mgmt if someone has a lead.
Thanks for reading.
Hi Ricky,
These are somereally goodpoints raised by you. Specially because these are points that critically evaluate Kovai as an investment proposition and I believe that most of us here at Valuepickr like to read a view with critical assessment.
At a high level I was also trying to find out the utilization/occupancy levels ofKovai and was trying to look atit the way we would look at a hospitality (hotel) stock (only in terms of occupancy/utilization as business metrics obviously are different), but wasn’t able to see any such parameters in the AR.
I concur with your views and it would be interesting to dig out the information as specified by you above.
I am always wary of companies with high debt. But, I think the debt servicing/repayment capabilities differ from industry to industry. At a high level, relatively I would be more confident of a hospital like Kovai to be able to service/repay its debt rather than a manufacturing firm because of Kovai’s business being insulated by economic downturns to an extent as compared to manufacturing business (assuming that ability to grow is restricted in both cases here). Hence, debt reduction is the biggest trigger for Kovai as of now.
Good thoughts by you. Keep posting.
Cheers,
Hitesh!!!
