Recommendation SUBSCRIBE BACKGROUND Price Band Rs 180-190 Company Overview Bidding Date Book Running Lead Manager Registrar Sector 12 15 Feb Kotak, Axis, GS, ISec, JM, Yes Link Intime Healthcare Minimum Retail Application Details At Cut off Price Number of Shares 78 Application Money 14820 Discount to retail Payment Mode Consolidated Financials (Rs Cr) FY16 NIL ASBA FY17 Total Income 5250 5931 EBITDA 446 332 PAT 8.2 267 Valuations* Lower Band Upper Band Market Cap (Rs cr) 9094 9599 EPS 2.0 2.0 BV/share 38 38 P/BV 4.8 5.0 P/E 90.4 95.4 *calculated Post Issue Shareholding Pattern Promoters 37.4% Public 62.6% Offer structure for different categories QIB (Including Mutual Fund) 50% Non-Institutional 15% Retail 35% Post Issue Equity (Rs cr) 50.52 Issue Size (Rs cr) 967-980 Face Value (Rs) 10 Runjhun Jain Assitant Vice President (+91 22 6273 8177) runjhun.jain@nirmalbang.com Aster DM is one of the largest private healthcare service providers which operate in multiple GCC countries, and an emerging healthcare player in India.. The GCC operations (81% of sales) are headquartered in Dubai, United Arab Emirates and Indian operations (19% of sales) are headquartered in Kochi, Kerala. The company operates in multiple segments of the healthcare industry, including hospitals, clinics and retail pharmacies and provides healthcare services to patients across economic segments in several GCC countries through their various brands Aster, Medcare and Access. It has a diversified portfolio of healthcare facilities, consisting of 9 hospitals, 90 clinics and 206 retail pharmacies in the GCC states, 10 multi-specialty hospitals and 7 clinics in India and 1 clinic in the Philippines. Objects of the Issue The issue comprises of Rs 255 cr of OFS and Rs 725 cr fresh issue which the company intends to repay debt and buy medical equipment Investment Rationale Strong Brand Equity Well diversified Mix of Service offerings Across Geographies Proven Track Record of Operating and Financial Performance Valuation and Recommendation Aster DM Ltd has shown consistent sales growth of 38% during FY12-17 with EBITDA growth of 16% as the company doubled its number of clinics in past two years. This has resulted in increased expenditure base. Further due to one-time write-off take in Saudi Arabia, the company reported loss at PAT level in FY17. However, we believe these are one-time incidents. We expect Aster DM to be back to double digit EBITDA margins soon. With the IPO money, the company intends to repay Rs 564 cr of debt, which would bring down the interest out go; aiding the bottom-line. We believe the valuations are fair considering the huge potential in the industry. Going forward, as the company is coming out of its investment phase, we expect Aster to report higher growth in profitability and improvement in margins as well as return ratios. At higher band the issue is offered at 19.6x FY18E calculated EV/EBITDA. We like the company s strong brand equity and consistent track record. We recommend investors to subscribe the issue for long term gains. Financial Snapshot FY15 FY16 FY17 1HFY18 Revenues 3876 5250 5931 3123 %growth 35% 35% 13% EBIDTA 506.0 445.6 332.1 178.2 % margins 13.1% 8.5% 5.6% 5.7% Adj. PAT 272.1 8.2-329.3-82.7 % margins 7.0% 0.2% -5.6% -2.6% EV/EBIDTA @190 28.0 36.6 33.1 P/E @ Rs 190-29.1 P/BV @ Rs 190 22.9 5.1 5.3 1 P a g e
Company Overview Aster DM is one of the largest private healthcare service providers which operate in multiple GCC countries and an emerging healthcare player in India. It currently operates in all of the GCC states, which comprise the United Arab Emirates, Oman, Saudi Arabia, Qatar, Kuwait and Bahrain, in Jordan, in India and the Philippines. The GCC operations (81% of sales) are headquartered in Dubai, United Arab Emirates and Indian operations (19% of sales) are headquartered in Kochi, Kerala. The company operates in multiple segments of the healthcare industry, including hospitals, clinics and retail pharmacies and provides healthcare services to patients across economic segments in several GCC states through their various brands Aster, Medcare and Access. It commenced operations in 1987 as a single doctor clinic in Dubai established by the founder, Dr. Azad Moopen. The company had 149 operating facilities, including 10 hospitals with a total of 1,419 installed beds, as of March 31, 2013 and have expanded to 323 operating facilities, including 19 hospitals with a total of 4,754 installed beds, as of September 30, 2017. It has a diversified portfolio of healthcare facilities, consisting of 9 hospitals, 90 clinics and 206 retail pharmacies in the GCC states, 10 multispecialty hospitals and 7 clinics in India, and 1 clinic in the Philippines as of September 30, 2017. A majority of the hospitals and clinics provide secondary and tertiary healthcare services to patients. In addition to providing core medical, surgical and emergency services, some of the hospitals provide complex and advanced quaternary healthcare in various specialties, including cardiology, oncology, radiology, ophthalmology, neurosciences, paediatrics, gastroenterology, orthopaedics and critical care services. Segmental Revenue Breakup - 1HFY18 Retail Pharmacy, 24.8% Clinics, 25.9% Hospitals, 49.3% Geographical Breakup - 1HFY18 India, 18.6% GCC, 81.4% 2 P a g e
Investment Rationale Strong Brand Equity Aster DM is well placed to capitalise on the expected growth in healthcare sector in the GCC states due to the early mover advantage, strong brand presence using a targeted strategy of offering different brands to cater to diverse group of customers and existing track record. Aster and Medcare brands address the needs of the upper and middle income segments in the GCC states respectively, while the Access brand offers affordable healthcare services to blue collar expatriate workers and the lower income segment in the GCC states. Further, the presence of the pharmacies at multiple locations across various GCC states also enhances the visibility of the brands. The company operates in India under the Aster, MIMS, Ramesh, Prime, Aster Aadhar and Aster CMI brands. Well diversified Mix of Service offerings Across Geographies The company has established presence across multiple geographies, multiple healthcare delivery verticals and serve multiple economic segments. It provides healthcare services in the United Arab Emirates, Oman, Saudi Arabia, Qatar, Kuwait and Bahrain, which comprise all of the GCC states (81% of revenues), in Jordan (which it classify as part of the GCC operations) and in the Indian cities (19% of revenues) of Kochi, Kolhapur, Kozhikode, Kottakkal, Bengaluru, Vijayawada, Guntur, Wayanad and Hyderabad. Its clinic in Manila, Philippines commenced operations in August 2015. The GCC operations encompass all levels of healthcare services from primary to tertiary and position it to be a one-stop destination for patients needs. In addition to providing core medical, surgical and emergency services, it also offer advanced surgical treatments in various specialties, including cardiology, oncology, radiology, neurosciences, paediatrics, gastroenterology, orthopaedics and critical care services. Proven Track Record of Operating and Financial Performance Aster has grown from 149 operating facilities in 5 countries, including 10 hospitals, as of March 31, 2013 to 323 operating facilities in 9 countries, including 19 hospitals, as of September 30, 2017. It has increased the bed capacity of the hospitals from 1,419 beds as of March 31, 2013 to 4,754 beds as of September 30, 2017. The ARPOB in the GCC states increased from Rs 93,264 in fiscal 2013 to Rs 130,026 in fiscal 2017 and Rs 148,843 in the six months ended September 30, 2017 and In India, ARPOB has increased from Rs 8,130 to Rs 22,175 and Rs 22,876 during the same period. Sales of the company has grown at a CAGR of 38% over FY12-17 with EBITDA growth of 16% over the same period. EBITDA growth was lower as the company doubled the number of clinics in GCC region in last two years hence the expenditure base increased without the benefits coming in sales. It can be further understood from the fact the company s sales grew by 48.6% during FY12-15 and EBITDA also grew by 48% during the same period. ROCE have also been in double digits barring the last two years which we believe would normalise from FY19 onwards, once the investment phase gets over. 3 P a g e
Industry Prospects The Gulf Cooperation Council (GCC) consists of six countries in the Middle East viz. the Kingdom of Saudi Arabia (KSA), the United Arab Emirates (UAE), Qatar, the Sultanate of Oman (Oman), Kuwait, and Bahrain. Amongst the GCC countries, the KSA has the highest population, followed by the UAE. GCC countries have a lower share of healthcare expenditure as a percentage of the respective country s GDP. In the GCC, Bahrain had the highest healthcare expenditure (5.0% of the GDP) in 2014, followed by the KSA and UAE (4.7% and 3.6% of the GDP in 2014, respectively). Expatriates constitute a substantial proportion of the population of GCC countries. This has a significant effect on consumption of healthcare services within the respective country as expatriates do not have complete access to public sector hospitals and thus rely heavily on services provided by the private sector. An increasingly sedentary lifestyle, especially of local populations, has resulted in high prevalence rates of diabetes, obesity as well as hypertension. It is estimated that the prevalence of these diseases among the local population is even higher, owing to their affluent and sedentary lifestyles, and high calorie food habits. Current and projected diabetes prevalence rates of GCC have significantly higher prevalence as compared to other countries analysed. Comparison of obesity levels in the countries in the GCC shows that most of them have higher levels of obesity than the USA and the UK. According to DHA, 98% of Dubai s population had insurance coverage in 2016, while approximately 38% of the KSA population was insured in 2016. Mandatory health insurance is also expected to increase private participation in the healthcare industry, with clear reimbursement rates and procedures in place. In this scenario, organised players which have a strong support system and are able to invest in upcoming infrastructure stand to gain by getting better reimbursement rates. India accounts for nearly a fifth of the world s population, however the overall bed density stands at 13 per 10,000 people. Not only there exists a conspicuous gap vis-à-vis the global median of 27 beds, bed density in India even lags that of some of the other developing nations such as Brazil (23 beds), Malaysia (19 beds), Vietnam (20 beds) and Thailand (21 beds). Growth contributors of the domestic healthcare delivery industry are: (i) rising population as well as life expectancy requiring greater health coverage, (ii) increasing income levels to make quality healthcare services more affordable, (iii) increase in demand for lifestyle disease-related healthcare services over the next five years, (iv) growth in health insurance coverage to propel demand, and (v) growth in medical tourism to aid demand of healthcare delivery market. Risks and Concerns 1. Change in Regulations: Gulf countries have strict regulations with respect to foreign ownership In GCC states which restrict foreign ownership, we have typically entered into shareholder arrangements with local shareholders which are intended to provide us with management control and a majority of the dividends or profits from our subsidiary notwithstanding our minority legal shareholding; the local shareholder acts as our nominee for the purpose of fulfilling foreign ownership requirements, is only entitled to an annual fee (irrespective of actual profits) and is not involved in the company s management. Any further tightening of the regulations can affect the above arrangement and the overall operations of the company. 2. GCC revenues have influence of Oil Prices: The economy of GCC countries is hugely dependent on Oil Prices. In the recent past years, Oil prices have come down substantially, shaking the economies of these countries. This has affected the spend in healthcare industry also as the governments across the region went on expenditure cutting spree (which resulted in One- time write-off the company had to take in FY17). 4 P a g e
Valuation and Recommendation Aster DM Ltd is a 30 years old brand and has proven track record. The company has shown consistent sales growth of 38% during FY12-17 with EBITDA growth of 16% as the company doubled its number of clinics in past two years. This has resulted in increased expenditure base. Further due to one-time writeoff take in Saudi Arabia, the company reported loss at PAT level in FY17. However, we believe these are one-time incidents. The company has strong financials and sound operations and we expect Aster DM to be back to double digit EBITDA margins soon. With the IPO money, the company intends to repay Rs 564 cr of debt, which would bring down the interest out go; aiding the bottom-line. The company faces seasonality in its GCC business (which is 81% of revenues) and gets only 25% of EBITDA in 1HFY (as GCC has 80% expats and 1H being hot temperature period, people go out on leaves) and remaining 75% of profits in 2HFY. We are comparing Aster DM with Apollo Hospitals, Narayan Hrudyalaya and HCG. Rs Cr Sales EBITDA Margins% PAT EPS P/E EV/EBITDA ROE Apollo 7072.2 789.7 11.2% 212.2 15.3 74.1 23.1 5.9% Narayan 2160.5 217.0 10.0% 54.9 2.7 116.8 31.0 5.5% HCG 804.3 121.1 15.1% 31.8 3.7 85.7 25.7 7.4% Aster DM* 6810.1 600.0 8.8% 100.6 2.0 95.4 19.6 5.3% Source: 1HFY18 annualized, NB Retail Research; * Our estimates considering the seasonality We believe the valuations are fair considering the huge potential in the industry. Going forward, as the company is coming out of its investment phase, we expect Aster to report higher growth in profitability and improvement in margins as well as return ratios. At higher band the issue is offered at 19.6x FY18E calculated EV/EBITDA. We like the company s strong brand equity and consistent track record. We are also positive on the industry growth. Hence, We recommend investors to subscribe the issue for long term gains. 5 P a g e
FINANCIALS Profit & Loss (Rs cr) FY12 FY13 FY14 FY15 FY16 FY17 1HFY18 Net Sales 1,181.4 1,921.7 2,871.1 3,875.8 5,249.9 5,931.3 3,122.6 growth % 62.7% 49.4% 35.0% 35.5% 13.0% Stock Adjustment (34.6) (38.2) (42.3) (115.6) (99.9) (114.8) (17.6) Pur of medicines and consuma 513.2 701.9 1,047.7 1,337.8 1,723.0 2,002.2 990.3 GM% 59.5% 65.5% 65.0% 68.5% 69.1% 68.2% 68.8% Employee Cost 222.0 513.8 791.1 1,153.6 1,629.0 2,054.5 1,127.6 % to sales 18.8% 26.7% 27.6% 29.8% 31.0% 34.6% 36.1% Other Exps 324.0 489.0 623.8 994.1 1,552.2 1,657.3 844.1 % to sales 27.4% 25.4% 21.7% 25.6% 29.6% 27.9% 27.0% Total Expenditure 1,024.7 1,666.5 2,420.3 3,369.8 4,804.3 5,599.2 2,944.4 EBIDTA 156.7 255.2 450.8 506.0 445.6 332.1 178.2 margins % 13.3% 13.3% 15.7% 13.1% 8.5% 5.6% 5.7% Interest 15.4 44.9 47.8 79.1 189.4 353.6 89.3 Depreciation 53.2 76.5 111.1 144.0 243.0 322.4 173.6 Other Income 7.8 17.0 18.4 23.2 25.3 36.6 18.8 Profit Before Tax 95.9 150.9 310.3 306.2 38.4 (307.3) (65.9) Tax 0.9 5.6 26.5 32.1 39.2 10.6 18.3 Deferred Tax 0.0 (0.0) 0.3 2.0 (9.8) 11.2 (1.8) PAT before share of profits 95.0 145.3 283.6 272.0 9.0 (329.1) (82.5) margins % 8.0% 7.6% 9.9% 7.0% 0.2% -5.5% -2.6% Share of profits 0.7 3.7 0.1 0.1 (0.8) (0.2) (0.3) MI (43.4) (57.2) (105.9) EO (596.1) PAT 52.3 91.8 177.8 272.1 8.2 266.7 (82.7) Adj. PAT 95.7 149.0 283.7 272.1 8.2 (329.3) (82.7) Adj Diluted EPS Rs. 1.9 2.9 5.6 5.4 0.2 (6.5) (3.3) P/E - @ Rs 190 100.3 64.4 33.8 35.3 1,169.1 (29.1) B.V Per share 15.4 15.4 18.0 29.4 8.3 37.1 35.9 P/BV - @ Rs 190 12.3 12.3 10.5 6.5 22.9 5.1 5.3 Debt/Equity (x) 0.4 0.5 0.8 0.6 7.5 1.5 1.6 EV/Sales 8.3 5.1 3.5 2.6 2.4 2.0 1.9 EV/EBIDTA 62.4 38.3 22.2 20.1 28.0 36.6 33.1 ROCE % 10.2% 14.7% 18.4% 14.0% 10.4% 7.3% 3.7% ROE % 10.6% 12.4% 20.7% 12.1% 1.6% -14.6% -7.6% 6 P a g e
Balance sheet FY12 FY13 FY14 FY15 FY16 FY17 1HFY18 Equity & Liabilities Share Capital 0.1 124.8 374.5 388.6 403.1 403.2 403.2 Reserves Total 670 654 536 1,096 17 1,472 1,409.8 Total Shareholders Funds 670 779 911 1,484 420 1,875 1,813 Non Controlling Int 217 363 460 762 177 375 364 Total Equity 887 1,142 1,371 2,246 597 2,251 2,177 Long term borrowing 199 241 526 612 2,577 1,891 2,150 Deferred Tax Liab 0 11 12 131 132 144 144 Other Long term liabilities - - 3 78 336 146 152 Long term provisions 28 57 72 105 147 175 183 Total Non-current Liabilities 226 309 614 927 3,193 2,355 2,629 Short term borrowings 79 142 204 289 584 830 721 Trade Payables 171 299 313 432 697 782 826 Short term provisions 4 11 26 39 40 30 43 Other Current Liab 277 237 366 479 645 559 699 Total Current Liabilities 531 689 910 1,239 1,967 2,201 2,289 Total Equity & Liabilities 1,644 2,140 2,894 4,412 5,756 6,807 7,094 Assets Fixed Assets 520 816 1,066 2,001 2,424 3,135 3,271 - Tangible assets 411 632 707 1,785 2,037 2,767 2,966 - Intangible assets 0 0 2 19 28 79 72 - CWIP 108 185 357 197 358 290 233 Goodwill 185 241 378 433 442 674 678 Investments 0 1 0 0 Equity accounted investees 41 6 7 12 11 11 11 Deferred Tax Assets 10 30 40 47 Long Term L&A 20 21 73 84 99 222 265 Other non Current Assets 0 0 13 71 244 252 209 Tota Non-current Assets 765 1,084 1,538 2,611 3,250 4,335 4,482 Current Investments Investments - - - 3 38 22 26 Inventories 108 153 196 311 411 526 543 Trade receivables 389 500 677 884 1,342 1,288 1,488 Cash & Bank balance 230 201 325 304 267 152 127 Other financial assets 151 189 115 126 173 233 84 Other current assets 1 13 43 173 276 253 344 Total Current Assets 879 1,056 1,356 1,801 2,506 2,472 2,612 Total Assets 1,644 2,140 2,894 4,412 5,756 6,807 7,094 7 P a g e
Disclosure: This Report is published by Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) for private circulation. NBSPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001766. NBSPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. It is also a registered Portfolio Manager having registration no as INP000002981. NBSPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBSPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBSPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBSPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBSPL or its associates or Analyst or his relatives hold / do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBSPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBSPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBSPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Runjhun Jain, the research analysts and authors of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 8 P a g e
Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBSPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBSPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBSPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBSPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBSPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBSPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and noninfringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBSPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBSPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBSPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBSPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBSPL. Our reports are also available on our website www.nirmalbang.com Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 6723 8000/8001 Fax. : 022 6723 8010 9 P a g e