Vaidya Sane Ayurved Laboratories Ltd (Madhav baug)

Indian Ayurvedic industry was valued at ~ 8 bn USD in 2022. It is gaining momentum on the back of government focus on building a healthy a fit India. Ayurveda is an alternative medicine system with historical roots in India and is gaining global prominence for its preventive healthcare properties and treatment of many chronic lifestyle orders.

While Ayurveda has been in existence since ages, it has not gained as much awareness as it deserves due to lack of clinical trials , investment and high fragmentation of the market with plethora of standalone clinics and wellness centres. That said, there have been early signs of uptick in the sector especially after the government set up Ministry of Ayush in November 2014 to promote Ayurvedic services and products.

Vaidya Sane (Madhav Baug) offers a lucrative opportunity to engage in the growth of this sector across the value chain, spanning from services to products. The company, led by Dr. Rohit Sane, aims to organize the industry by establishing a network of clinics and hospitals, while enhancing clinical outcomes through a distinctive blend of diagnostic testing and Ayurvedic services, along with its proprietary products.

About the company

Started in 2006 with its 1st cardiac hospital in Khopoli and 1 clinic in Dombivali, Madhav Baug has expanded to more than 300 clinics and 2 hospitals with 60 beds as of FY 23. The company serves its outpatients through an extensive network of clinics across 8 states, and it caters to IPD + OPD through 2 hospitals located in Khopoli and Kondhali. The company achieved a revenue of 100 cr in FY 23 vs 75 cr in FY 22 with EBITDA margin of ~ 8%.

Out of the total revenue of 100 cr, hospitals accounted for 30% of the revenue, while clinics accounted for the remaining amount. The company focuses on innovative reversal therapies for conditions such as heart disease, diabetes, blood pressure, and obesity management. I won’t elaborate on India being recognized as the diabetes or chronic heart disease capital of the world, as this is well known. Needless to say, this translates into a large opportunity for the company.

Through years of intensive research, Vaidya Sane launched standardized diet kits for each disease in 2016. This unique delivery approach was a game-changer for the company, as it ensured easier medical compliance by providing patients with pre-packaged daily food kits required to adhere to the treatment.

The company asserts the high efficacy of its treatments, supported by the publication of numerous trials and studies in highly reputable global journals, which serves as a testament to their quality. In 2017, they released a randomized controlled trial in the Indian Heart Journal, the official publication of the Cardiological Society of India. Subsequently, they have published additional reports in esteemed journals such as The Lancet, World Health Foundation, European Journal of Biomedical and Pharmaceutical Sciences, Asian Journal of Cardiology Research, and the International Journal of Diabetes and Endocrinology.

This approach stands as a solid foundation to enhance credibility surrounding their treatments and to raise awareness through clinical trials. For those who are interested, the provided link can be accessed to learn more

Clinics

The company operates under two distinct models: company-owned and franchise-owned. As of FY 23, it had a total of 302 clinics, with 196 of them being operated as franchises. The company initiates the process by establishing clinics on its own and subsequently, based on the doctors’ performance, these clinics are offered to potential franchisees for a fee. While the company generates revenue primarily through the sale of products, the service-related revenue is attributed to the franchise owners. This dynamic results in the reported revenue from clinics being 70 crore rupees, whereas the actual cumulative collection at the enterprise level amounts to 153 crore rupees.

The economics are strong: – Cost of setting up a clinic is 20-25 lakh, The monthly operating cost is 2 lakh. A clinic reaches maturity over 2 years on average where it reports ~6-8 lakhs a month. GM is 70%.

The company has opened a lot of clinics over the past couple of years which are yet to reach maturity and hence, one can expect operating leverage as the clinics scale. This is reflected in the average revenue per clinic which is still below 50 lakhs per annum.

Hospitals

The company has 45 beds in khopoli and 20 in Kondhall. It uses advanced diagnostics and stringent plan for patients here for treatment along with Panchakarma therapy. The Khopoli hospital is NABH accredited and the company has tied up with 30 insurance companies through TPA.

Investment Thesis

  • One of the few companies trying to organize a growing industry. Acceptance requires credibility and the company is working towards it through research papers , word of mouth and significant investment in marketing – digital and on ground through exhibitions , trade shows etc. The company spent 16% of reported revenue on marketing in FY 23. Despite such investment and clinics yet to hit maturity, the company reported ~ 25% ROCE in FY 23

  • Investment in technology, marketing, unique and innovative delivery through diet kits and amalgamating diagnostic tech with ayurveda despite its small size reflects the DNA of the management. The company has a doctor facing app to monitor the progress of the patients and consumer facing app for medical assistance, health and exercise monitoring, medicine support etc. The app has more than 100k downloads. It even has a clinic management app for inventory management at the clinic level.

  • The company has ambitions to increase number of clinics to ~500 by FY 25. They would open about 80 clinics in FY 24 in focus states like Kolkata, Punjab, Delhi and Rajasthan. The company is also expanding its number of hospital beds to 120 which would entail 7-8 cr of capex. The company has ~16 cr of cash on its books and has recently raised 40 cr through warrants from marquee investors like Mukul Aggarwal, Sundar Iyer – more than sufficient cash available for expansion over the next many years.

  • The company is launching new products like Madhavprash, gummies, herbal teas and juices, atta etc. Vaidya Sane has acquired 2 companies last year to enter manufacturing of these products (Dynamic remedies and UV Ayurgen Pharma). It sells these products online and is exploring opportunities to expedite offline distribution channels through acquisition. One can see and buy the list of products on Buy Health & beauty Products Online | Online Shopping | Live Life Well | Madhavbaug Wellness. They have recently started selling their products on Amazon , 1mg etc.

  • The company is exploring NABH accreditation for its clinics too which could be a big game changer. Apart from this the company is partnering with corporates like JSW Ispat, Central Warehousing corporation etc to provide services to members/employees of such organizations at discounted pricing. They are also trying to convince corporate insurers for coverage of these services in their insurance policies.

  • Margin drivers – Operating leverage – scale (16% marketing , 20% expensed on salary in FY 23) and maturity of clinics and in house manufacturing of products through 2 acquisitions made in FY 23 (Dynamic Remedies and UV Ayurgen). Expect the EBITDA to increase to double digits over the next three years with 25% growth in topline.

Risks

  • Whatever said and done, most people still have more faith in allopathy vs ayurveda. Increasing awareness will take time and requires substantial investments. Govt support and promotion will help immensely in this aspect
  • The company has more than 220 clinics in Maharashtra with thin presence in other states. It needs to be seen if the company can replicate this success in other states as well. Even marketing seems to be more focused and regional (Maharashtra) for now and this needs to change. Quality of marketing (atleast on YouTube) needs improvement
  • Building offline distribution will be critical for its retail products to do well. The company could look at an acquisition here
  • While a lot of things can play out, execution remains key and requires strong talent at the top. Needs to be seen how the company fares on this.

DISCLAIMER - INVESTED AND BIASED

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Sources

Conference call – https://madhavbaug.org/analyst-call-investor-presentation/

Investor ppt - https://archives.nseindia.com/corporate/MADHAVBAUG_29052023131141_Intimation_InvestorPresentation_Submission_Signed.pdf

Interview with the management -

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App : mibPULSE (patients are connecting with the doctors to stay connected with the patient vitals)

PowerMAP - Gadkari ji inaugurated this. AI approach

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Thank you @mantis1 for such an amazing write up about the company. It saved me time in making my own notes about it. To add to your write up, I have done my own analysis about the company as I’ve recently taken an exposure in it. The below highlights my rationale behind investing in the company,

Growth:

  • Company owned clinics are going to expand from ~400 in FY24 to ~1000 in the next 3-5 years.

  • Current hospitals in Khopoli and Nagpur are going to see their beds double in the next 12 months. Eventually, 8 more hospitals/health resorts are going to be launched in the next 3-5 years.

  • A lot of the infrastructure, personnel and marketing costs are being incurred upfront. As sales kick in and these margins stabilize and become efficient over time, the business will see a good margin kicker coming in. Furthermore, the company’s plan on backward integration for its food kits will improve the margins further. All of this will flow to the bottom line. Thus, there is a nice operating leverage play waiting to happen here.

  • Growth in the patients visiting these clinics and hospitals as the brand and the treatment it offers becomes more visible. This will happen through word of mouth (more patients = more gospel being spread), marketing spends, tailwinds in the sector with the government pushing ayurveda through the ministry of Ayush (just like it pushed Yoga).

  • Launch of its B2C products in offline stores and setting up offline distribution for the same.

Company/industry potential:

  • Unorganised to organised theme at play here for ayurveda treatment.

  • The company is adding value by offering a chance for disease reversal using ayurveda viz a viz allopathy and doing so at a lower costs. This is the value migration at play here.

Risks:

  • EXECUTION. The single BIGGEST risk. The company and its promoter have set really high goals for themselves. They may not be able to achieve this in the timeframe they’ve set or the quality of services and products may suffer as they scale. They may not be able to scale margins beyond excel projections. People may remain skeptical of ayurveda and the patients will not increase as projected.

  • Key man risk. Second BIGGEST risk. Everything rests on Dr. Rohit Sane and his vision and dream. The company over time will need to add more professionals to the business. Though, they do have some professionals like the CEO, CFO, Marketing head etc. in place.

  • The failure to building Madhavbaug as a brand.

  • Its B2C product venture fails to have the desired impact. Worse still it takes away time and limited company resources from its main mission of building more clinics and hospitals. It has happened in H1 FY24 where the management was busy in marketing its Madhvprash product and this impacted the sales, margins and profits.

  • General management missteps and highly ambitious goals that fail to materialize beyond presentations and excel sheets.

In summary,

Parameter Rationale/Thoughts
Sales growth starting FY25 Sales are expected to grow ~20-25% for 3-5 years
Margin expansion EBITDA margins are expected to increased from ~9% EBITDA (in FY23) to ~15-20% EBITDA over the next 3-5 years
Profit growth Profits should grow at ~20-25% over 3-5 years with steady state margins. But the fun part is, the margins are going to expand, hence the profits will grow at a faster rate than the expected sales growth
Valuations Here is how I’m looking at it,
  • PE ratio: 70 at CMP of 215. With ~20% growth on the exit EPS of FY23 (4.59) works out to an EPS of 5.50, thus resulting in a PE of 39 for FY24. One-year forward EPS of 6.6, results in a PE of 32.57. Is this cheap? Well not really, but for a company poised to grow for a decent period of 3-5 years with an expected expansion in margins, it is not overly expensive either. I think it is fairly valued
  • PEG ratio: At a PE of 39 (FY24) and PE of 32.57 (FY25), there is a chance that the company will grow its profits at these speeds or higher over the next 3-5 years. Thus, it should have a PEG of 1 or under, again making me believe it is fairly valued
  • Price to sales ratio: The company is available at P/S ratio of ~1.87 on FY24 exit sales (Mkt cap 224 crs /120 crs revenue) and ~1.55 on FY25 exit sales (Mkt cap 224 crs / 144 cr FY25 sales). The question I ask myself, will I buy a business under 2 times sales? At this juncture, I’m getting a fast growing business with - cash on books, land and buildings, tech and systems in place to grow and scale, a somewhat proven business model, trained staff and processes and a hardworking promoter/owner. The answer is, hell yes!
  • Stock is down ~42% from its 52-week high, it is already beaten down and some of the early hype about the business seems to have faded away. Can it fall further? Sure, in case of market corrections and poor results, it may go down further, but to me the downside from here looks limited. For e.g. if it goes down another ~30% (under normal market conditions), I would suspect there is something wrong with the business/promoter. A company with a clean balance sheet like this shouldn’t get hammered further (at least in my experience).
  • In the last fund raise in July 2023, a set of marquee investors were issued warrants at 261, currently it is trading below that. I ask myself, if they saw value at 261, why can’t I at this stage?

Thus, my general consensus is that the stock seems fairly valued at this juncture and should do well with as the business grows and scales

Parameters Rationale
Promoter Holding Dr. Rohit Sane, the founder of the business has a lot more skin in the game than I do, he holds 66.29% of the company. He has more to lose than I do. He also comes across as a very passionate promoter. Very driven to solve the problem of diseases by going to the root of it and reversing them. I want to back a promoter like this.
Dividends Short history to ascertain the same. Though the company did give one in FY23
Balance Sheet No debt on the books and the business growth has been funded mainly from internal accruals in the past. The current fund raise will ensure the balance sheet will not get stretched going forward either. So, there is less risk of the company becoming insolvent
Ratios Good cash conversion cycles, less working capital days, 20% type of ROCEs, with the business growing and getting more efficient, these should get better over time
Moats 1. First company (in my knowledge) to attempt organizing the unorganized ayurveda treatment market to an organised one 2. Their food kits (including its backward integration), treatment processes, research papers, tech enabled platforms and systems, trained ayurveda doctors, well established and organised clinics and business model 3. Over time, it’ll be their brand ‘Madhvbaug’ which they are building from scratch 4. In time their scale and ambition of setting this up pan India and making it a truly national chain of clinics and hospitals
Triggers for stock price growth 1. Expected growth in number of clinics and hospitals 2. Expected sales growth 3. Expected margin expansion 4. Expected profit growth 5. Foray in B2C products and setting up of physical distribution for the same 6. Better discovery of the company and its business model in the markets
Odds in my favour? Yes, I think investing in this company at this juncture renders the odds in my favour

Sources:

  1. All projections and details are based off numbers shared by management in their publicly available concall and interview
  2. Numbers have been taken from Screener
  3. Comparative PE ratios of companies in the similar business of hospitals, clinics and diagnostics

Disc: Invested as a tactical 2-4 year bet. May hold longer depending on how management executes its plans. Position size is 2.3% of my entire pf.

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