Ptl enterprises

I have 1 share in PTL Enterprises, which is a standard position on anything that catches my fancy.

While promoter integrity is an issue, there are couple of factors you should keep in mind:

  1. While promoter tried to sell off the hospital business cheap in the past, it is worthwhile to consider that they called off the sale once shareholders raised concerns. There is nothing that compels them to do so. It is indeed possible they just did not want to be in this business and wanted to get out quickly. However, as Anant has noted, Kanwar’s biography shows that the younger generation in the family is very passionate about healthcare - so you may consider that going forward the management may be comprised more of individuals interested in this business than just the patriarch who runs the tyre company.

  2. The shareholding of Govt of Kerala in this entity and eventually Artemis too is likely to ensure that rights of shareholders will not be nakedly trampled upon. It is possible this was also a concern when the sale of the hospital business was called off last time. In any case, government stake in the company offers some protection, however little.

  3. The demerger is likely to pave the way for institutional stakes in Artemis. By this, I do not mean mutual funds and FIIs, but strategic funds interested in the healthcare space. Healthcare has seen sustained interest by strategic investors over many years now, and Artemis would be one entity that would be ripe for investment if the management wishes to go for it.

In the end, you have to look at the margin of safety. The question you ask yourself is, if the management remains as it was in the past, and the business continues on the trajectory it is on, how much can I lose? And how much can I gain? It is simply a risk vs potential benefit analysis, based on hard facts. You take the worst case scenario and see how much you can lose. In a really expensively valued business, 90 out of 100 scenarios will be negative and will likely lead to significant erosion of capital invested. When you have reasonable valuations and little downside if the business continues on autopilot, then you can invest and sleep easy at night. Optimism is a luxury in such situations, not a necessity.

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The last paragraph is a gem. I will have opportunity cost but the erosion of capital may be very less. Thank you for the enlightenment. However if we see, the stock rose from 25 to 145 in matter of 3 years. Whereas the profit growth wasn’t 6 times. How do we account for the valuations going back to the old time in case business keeps going on Autopilot and stops growing with flattish PAT growth? Like for the next 6 yrs, rent will not grow and from last 2 years their PBDT growth is also stagnant.

Thanks
Kanv

When I posted, stock price was around 115-120, where I saw excellent margin of safety. I still think there is margin of safety at 140, but that is your call to take.

Rent will not grow much in my opinion. If you will read the annual reports and notes to financials carefully over last many years, you will realize rent is increased periodically but after long gaps of time. So growth in rent should not be a factor in anyone’s calculation. The real value you are looking at is Artemis. Potentially, the revaluation of the Kochi land may also be a big value addition, but it is subject to such land being actually sold. That may or may not fructify.

The best way to look at such situations is to take the highest possible discounting to the land + rent business and see how you want to value the hospitals business, especially in view of the proposed expansions. I would say this would be no less than a 3 year investment for any hypothesis to play out.

I agree with you Kanav, I do see some issues with the management, historically too there were issues with the company/group and the link attached points out the same. There are three points that I would like to make:

a) Promoters in Indian context have huge leeway in terms of the way they can stifle minority shareholder interest. Despite trying out as they did the promoters did not try out other means to run away with the subsidiary. As another example you can take a look into TIL ltd’s case where a 100% held subsidiary was transferred to private ownership with huge losses to minority shareholders.
b) There dealing of Cooper in my opinion was very good. They tried to buy a larger player and decided against it when the Chinese subsidiary of Cooper (50%) demanded very high valuation. They were also rational in selling of their South African subsidiary and in cutting down the losses.
c) I also think that there is a subtle change in the psyche of the promoters. I think that most promoters have started realizing that it is better to be honest and respect minority shareholder rights if they were to create wealth in long run for a simple reason that institutional investors are more likely to partner an honest promoter and at better valuations.

It has been a difficult call for me but I went ahead due to the value on the table and also the ability of the promoter to scale up this business.

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Thanks Anant for the reply. Management itself is not interested in running the business as you pointed out. If his grandson is capable enough, then yeah we can have good business at very reasonable valuations.
I somehow don’t feel very comfortable with managements who have tried to dupe shareholders because I have burnt my fingers in many companies. Demerger can unlock a value. I hope it turns out a good bet for you.

Kanv

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Such Promoters, if they are doing a demerger then it indicates that somone has showed him how value can be created.

Normally such promoters wont spend money and time for nothing, unless they are finding a bigger better stash somewhere.

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As per half yearly compliance report (for 2014) submitted by Artemis occupancy is around 80% which is very good.( No of beds mentioned in this report is 206).


I could not find any recent half yearly report with same details.Sometimes hospitals may under report no of beds to authorities to reduce the cost.
Disclosure: invested

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Any idea why Indraprastha Medical (Apollo Hospital in Delhi) stock price is languishing for so long…similar profile (single hospital, catering to Delhi, Delhi Govt minority ownership, good brand name - Apollo)…also Artemis being a single hospital does have the risk of reputation (some operation gone wrong & highlighted in press) or some govt regulation (free beds, stent price cap, other caps which we have not yet thought of).

Just being a devils advocate and challenging the optimistic posts on PTL.

Cheers

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For a high end tertiary care hospital in a high price market like gurgaon and focus on MVT i.e. International patients along with 75% occupancy, 10-12% OPM looks highly sub-optimal. Also, checked with a PE friend whose fund is invested in a tertiary care setup though not this high end or such pricing, EBIDTA may range between 18-22% for such setups even at slightly lower occupancy but with efficient procurement and HR deployment. He suggested 14x EV EBIDTA in general for a decently run set up i.e. 18-22% EBIDTA.

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Currently the occupancy is close to 100℅ , in my last 2 visits I found the waiting period to be of 20-30 days. On complex procedures, they claim to do liver transplant, joint replacements both I have seen.

They are planning 200 more beds but I think it will take time to add this infrastructure…They do have additional land in the existing premise.

I see margin expansion the only way of increase in earnings for next two years at least. New building will take minimum 1.5 years to get finished. Also Dwarka hospital can contribute, but I have no idea on that…

Overall they have good reputation in Gurgaon area…

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I work in healthcare consulting so can say that they do enjoy decent clinical reputation. Also, regarding Dwarka facility, I had a discussion with a senior guy at Artemis. As per him, it’s a small facility so may be more like a spoke for Gurgaon. May be secondary care or at best basic tertiary care facility. For a facility of this scale and occupancy, margins should be much higher as pharmacy and diagnostics too start contributing significantly and these are margin accretive. Really surprised at such low OPM.

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Also 100% occupancy is a myth as you may not have supporting HR to achieve it. Usually above 85% clinical performance may start deteriorating or you may start turning away IPD patients. So it’s usually advisable that with occupancy touching 80%, your new capacity should be ready i.e. up and running.

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Do you think that it is possible that management is inflating the expenses in books to keep tax liability low and pocket some cash off the books…I may sound idiotic but have experienced my family members who run small businesses following this practice…

Not invested yet

Hi Saket,

Thanks for your views. You are from the same industry, hence your insights might be superior. I posted my views as a patient. I have visited the hospital numerous times in last 2+ years and have seen the bed occupancy rates improvening. When asking to admit, they don’t have the bed for patients at least for a week. In my last visit the guy at the counter told me waiting period of 28 days.
The time I visited last could be peak and hence the management plans expansion.

On margins, yes they are cheapest in good hospitals. I have seen that in my medical bill. And this is the reason they enjoy much better bed occupancy in comparison to other nearer hospitals of Gurgaon such as Paras and Medanta. And this might be the reason I see lots of international patients in the hospital.

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I agree with your points that they have good occupancy. Even 80% is excellent by the way. Waiting period may also be due to unavailability of doctor slots or OT rather than beds. However, it’s really interesting to know that they are priced lower than Paras as I was under the impression that Medanta and Paras are two ends of the spectrum in terms of pricing or positioning with Artemis closer to Medanta. Can you tell me the specialty for which you found the pricing to be lower than Paras?

As I mentioned earlier I took liver related treatment and joint related treatment, for lever one I consulted in Paras and Medanta. In both of the hospitals consultation fee, lever tests fee and medication fee was higher than artimis. This could be one time event with me only but tests were same and charges were less.
My other friend had good experience with Paras but I never heard good things about Medanta.

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Any idea on how many months it takes for demerger once NCLT cleared it. Hospital business definitely has the value.

PTL has announced the record date. it is 23.03.2017.
Are the shares issued on the same day? What normally happens to the share price of PTL enterprises?

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/9873d073-d27a-4fb0-b5ef-f5ee1a1600d3.pdf

Disc: Invested

Folks, a little long notel to see how a special situation is developed . it took one year for the finale. i entered last june to aug period @122.

next on radar is sundaram finance for a similar demerger…

https://investmentgyaan.wordpress.com/2016/02/05/potential-risk-free-investment/comment-page-1/#comment-94

Also, reposting an old conversation of some v learned boarders like Lincoln sir, Valan ji on PTL demerger story**. please read it from bottom.**

LN : Fantastic analysis. BoAML would easily recruit you on campus (read MMB) for the post of Sr. Analyst. In sum, the value of the 2 company`s shares 2 months from today would be around Rs.180, which gives a decent return of 50% from the CMP around Rs.120. If it falls to 160, the return would be 33% which is still not bad for a 2 month stint. Safe grounds so far. Further, it is a Raunak Singh (Apollo Tyres) group company. The group has a lot of muscle in and around Gurugram to ensure high occupancy rates through Corporate schemes, etc. Also, they are both Super-Speciality hospitals, which would command a premium. Two months of patience required. LINCOLN

lpc, valan, aditya:

i have done some more digging on ptl enterprises and based on what munna told me, valuation of hospitals. my comments as follow:

  • in aug 2014 when ptl tried to sell off the hospitals for 200 crore, this proxy advisory firm called iias analyzed the company to see what the right valuation could be for the hospital business.

  • as per their comparisons, hospitals are valued between 1.5-2.5 crore per bed. on this basis, they valued the 347 beds of artemis hospitals at approximately 820 crore.

  • artemis hospital in gurgaon has the provision to expand up to 500 beds. from informal sources (fellow investor community), i have been told that the 300 bed hospital already has 380 beds. this takes total beds to 427 (380 plus 47).

  • on a reasonable valuation of 1.5 crore per bed, this works out to approximately 640 crores for the entire hospital enterprise. if the bed count goes up to 547 (500 plus 47), then the valuation could be 820 crores.

  • do note that the entire market cap of ptl at the moment is 800 odd crores. if one were to assign a higher valuation per bed, which is possible since there have been recent investments into hospitals at 3cr plus per bed, it essentially means the hospital business right now could be worth almost as much or more than the current market cap of the combined entity.

  • for the hospital to be valued conservatively at 540 crore, the share price of the demerged entity would be rs 83.

  • the land bank worth 547 crores under ptl is worth approximately 90 rupees per share. add in the cash flows and you could get a possible enterprise valuation of inr 100 per share. however, there will be a discount in this regard as there is no visibility as to when this land will be sold.

overall, i think there is significant scope for value unlocking after my above analysis. the hospital enterprise, as lpc said, deserves to be held for a year or two, especially since hospitals are a long gestation business and artemis has been profitable since 2011.

  • based on land bank and possible valuation of the hospital

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Aditya : Xchanging and PTL are short term projects. Xchanging is a done deal @ 109 and PTL would, in all probability, declare the Record Date for the demerger by end Sep. The momentum in this stock will start building up around that time and will go all the way till the actual date of the RD. As rightly pointed out by our Valan, a return of 20 to 25 % in 2 months might be reasonable. On my part, I will hold on to the new shares (Healthcare) for 4 quarters, at least, to take advantage of LTCG benefits.
The 2016 AR of Morepen Labs is not yet on the BSE website. Shortly, I will give the link to the same on this board. It makes interesting reading. After 5 years of losses, the past 5 quarters have shown increasing profits, USFDA approvals, and other positives. I expect it to double in 2 years. Not a counter for daily excitement like XSL. Buy right, sit tight. Contra-opinions and critique welcome. Helps improve my personal stock-picking capabilities.


LN : I have replied to all your observations covered over 2 messages, save the strategy. I will neither sell before the demerger or after. On the one hand, I am getting a Healthcare Services “for free” and it is a fast growing sector. Plus, my cost price being NIL, I would have to pay stiff STCG tax on the full sale proceeds if I sell within a year of allotment. In 4 quarters, the new company will be able to prove if we should still stay on or quit.
Reg. the old boy (PTL), his earnings and profit have the potential to grow for reasons discussed earlier viz. increase in lease rent, monetizing the land bank, etc. I`m not sure if the Revaluation Reserves of over 550 crs. could be transfered to General Reserves. Any Accountant on the board may confirm the provision in law.
To sum up, if my 120 becomes 160 at the time of demerger, I am happy. By nature, I do not sell shares in a hurry unless there is a Special Situation like Xchanging where, even Valan, after his “old dog new tricks” adage, walked away with a cool 20% before the demerger and is now looking forward to another drink on the 9th !!! Congratulations to the old boy. Any board is dead w/o his inputs.
LINCOLN

lpc - now that the excitement on xchanging solutions is just about done, i want to thank you for walking us through the process. i truly hope this is just the first of many such ventures together.

in that spirit, i crunched some numbers of ptl enterprises last night. one thing i am not certain about the demerger is that whether both the entities will have the exact same number of shares as ptl enterprises has now? this would be 6.5 crore shares of 2 rupees each. if this is so, the following are my calculations:

  1. artemis hospital has a topline of 400 crores and bottomline of 21 crores. the bottomline is improving as some debt has been retired and i believe more debt will be retired as cash flows improve.

  2. with a bottomline of 21 crore, the eps on 6.5 crore shares would be approximately 3. what multiple do you think we can give to this entity? most hospital companies i looked up (the big ones at least) are loss making or are not valued based on pe alone.

  3. i take indraprastha medical as a comparison - it is trading at a pe of 19 with no bottomline growth for the last 6 years. top line has grown well, but the profitability has taken a hit. on the other hand, apollo hospitals trades at a pe of 49 with flat bottomline for last 3-4 years.

  4. if we take a pe at the lower end at 15-17 for artemis, we get a share price of around rs 45-50.

  5. now coming to valuing ptl itself as a standalone entity, the rent for the facilities was recently revised and is likely to remain the same for a while. debt has been repaid, so the bottomline of 25-27 crores should remain constant. this gives us an eps of 4.

  6. a stable non-growing entity like standalone ptl is unlikely to be valued higher than a multiple of 15. this gives us 60 rupees a share for the enterprise.

  7. accordingly, artemis and ptl taken together may have a value of around 50 and 60 respectively, which is a slight depreciation on the current price.

  8. i have not factored in other aspects which are commonly a part of valuations, like the revaluation of the land bank that was undertaken for the tire facility. this could change the final numbers a fair bit.

please note lpc that the above are back-of-the-hand calculations and i would be glad if you were to point out assumptions or factors that i have missed out.

i seek your inputs therefore, on what i have missed out. i do now you expect a price of 140 odd for ptl when the announcements comes through. are we looking at buying and selling pre demerger or after the demerger?

i know strategy is personal to each, but maybe we could learn from your manner of thinking and tutelage. don`t want to be focusing on the wrong things in special situations :slight_smile:

LN : As always, great analysis. My take :

  1. Demerger Ratio is 1 : 1. Therefore, the paid-up capital of Artemis will also be Rs.6.50 crs.(FV Rs.2)
  2. Artemis Hospitals (there are 2 of them) are super-speciality hospitals. The waiting time for admission is 2 to 4 weeks ! Margins would be much higher. Large no. of Corporate clients with numerous health scheme packages (like most other hospitals). Both based in and around Gurgaon - big money area. Health Services (Dr. Lal`s Pathlabs, Thyrocare, etc.) are the flavour of the season. 75% Promoter (Apollo Tyres) holding. Unlike other hospitals, has a sound bottom line. Could give a multiple of 30 taking the price to Rs.100.
  3. The residual company (PTL) will continue its existing single line activity viz. leasing its plant to Apollo. The Lease Agreement was signed @ Rs.40 crs. p.a. Within 12 months, it was increased to Rs.50 crs. in Aug 2015. After the excitement / formalities of the demerger are over, we might see another enhancement, considering 75% of PTL is also held by the Apollo Tyres Group - one pocket to another !
  4. PTL has a large land bank in the heart of Kochi, one third of which contains the Tyre Plant. The rest could be monetized. Six months back, the assets were re-valued prior to demerger and now stand around 550 crs. A slice of land has gone to Kochi Metro but payment not received due to a fight about the rate (some conflict of interest story) Google might throw some light. I would give it a multiple of 20 for aprice of Rs.80.
  5. Therefore, the aggregate could be between Rs.160 and 180, giving an yield of 33% to 50% in 2 months. With each passing quarter, Artemis MP would rise with its improved bottom line. In Jan 2016, Alkem Labs (a pharma company) had an IPO @ Rs.1,050. Last week, it had crossed Rs.1,600.
  6. Safe bet. Old PTL has a minimum EPS of 4 (which could always rise but not fall) and Artemis could only get better as it becomes debt-free.
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The sum and substance of the conversations in your post is summarized in the PDF I had attached to my post 9 days ago (see above). As you might guess, I am the “LN” in the above conversations.

Just FYI.

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