Yatharth IPO: Should you subscribe to this IPO?

Yatharth Hospital & Trauma Care Services (Yatharth) is an NCR-based healthcare company operating four super-speciality hospitals. Three of the facilities are based out of Noida/NCR region and the company acquired an ailing facility in Jhansi in 2022. The IPO (fresh issue of ₹490 crore and OFS of ₹196 crore) offers a growing healthcare outfit at a valuation of 39 times FY23 earnings on a post-issue basis, which is in line with mid-sized hospital peers.

With a mix of mature and new facilities, the company offers scope for growth in the medium term and we recommend investors subscribe to the offering. Private healthcare, in the absence of robust public facilities, is bound to gain from high demand of the rising middle-class. The comparable valuations and multiple levers for growth also support the IPO.

Getting better

The hospital sector relies on capacity expansion or pricing growth to drive earnings, and Yatharth’s current stage of life-cycle offers scope in both areas.

Occupancy ratio: Mature hospitals of the group (with more than four years of operations) located in Greater Noida (commercialised in 2010 with 400 beds now) and Noida (2013 and 250 beds), reported an occupancy ratio of 62 and 88 per cent in FY23. This is well above industry average of 60 per cent. This is compared to Noida Extension’s 31 per cent occupancy as this was commercialised in 2019 (450 beds) and after two Covid years. Yatharth also acquired Ramraja in Jhansi (Madhya Pradesh) for ₹80 crore for 305-bed capacity hospital. The facility went under because of Covid and operations restarted only in FY23 after a two-year gap and it reported 8 per cent occupancy for FY23. The latter two facilities can support higher volume growth in next two years, as occupancy ratios improve. For instance, as Noida Extension improves from 31 per cent to 40 per cent occupancy and Ramraja in Jhansi improves from 8 to 20 per cent in next two years, close to 5 per cent revenue growth can be expected, all else remaining same.  

Beds and capacity: Yatharth is in the process of securing land parcels adjacent to Greater Noida and Noida Extension facilities. The IPO proceeds from fresh issue (₹490 crore) includes ₹133 crore dedicated towards capex at the four facilities. An amount of ₹65 crore is earmarked for expansion to acquire or build new facilities. The group should be able to add 10-15 per cent to existing beds with facility extensions or acquisitions with the IPO funds in the next three years. The company also raised ₹120 crore from investment funds at the higher band of IPO in pre-IPO placement.

ARPOB for super speciality: The company reported 11 per cent ARPOB CAGR growth (average revenue per operating bed) in the last three years even as management pointed to minimal price hikes. This was on account of moving up the specialisation value chain in medical care. The group now looks to hone its skills in more specialities, including oncology, transplants and IVF segments. This should aid higher utilisation of assets and higher ARPOBs. With additional hikes from Central and State government reimbursement rates (33 per cent revenue contribution) and similarly from insurance administrators (35 per cent), Yatharth should be able to sustain at least 5-6 per cent increase in ARPOBs in the medium term.

Financials and valuation

The company reported revenue and PAT of ₹520 crore and ₹66 crore in FY23. Yatharth has a net debt to EBITDA of 1.68 times as on March 31. The company aims to be debt free from IPO proceeds of which ₹245 crore is towards clearing debt. This should improve PAT margin by 200 bps in FY24 as interest cost will be eliminated. The company already has an industry leading EBITDA margin of 26 per cent in FY23 and should further improve as Ramraja facility improves from -35 per cent EBITDA margin in FY23.

The group also faces its share of risks. Three of the facilities are concentrated in Noida region, which exposes the group to geographic concentration risks. The region is also highly concentrated in medical services. The group reported a 45 per cent attrition rate in doctors in FY23. The management expects to improve this ratio as accreditation required to hire senior doctors is expected in FY24. This should lead to longer employment at the facilities. The turnaround of Ramraja facility is also a key monitorable. The ability to attract and retain experienced staff at Jhansi, increasing the menu of speciality services at the facility and the investment required to deliver the same will impact profitability.

But assuming improving occupancy, bed count addition and ARPOBs at the top line, Yatharth should be able to deliver 10-13 per cent topline CAGR in FY23-25. Further down, assuming lower interest cost and improving profitability of Jhansi facility should support 30-35 per cent earnings CAGR in the next two years. The post-issue PE ratio of 39 times FY23 earnings can be supported with such earnings growth assumptions.