India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

HealthCare Global Enterprises / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/23983" target="_blank" data-smartkarma-citation="entities:23983">HealthCare Global Enterprises Limited (HCG IN)</a> is a speciality healthcare provider with a focus on cancer and infertility treatment. It is the largest provider of cancer care in India with 19 comprehensive cancer care centres under its “HCG” brand. It is also one of the leading providers of infertility treatment under the “Milann” brand. The HCG Enterprise is run under the helm of Dr. AjaiKumar, a doctor (promoter) who is the Chairman and CEO of the company. He has over 40 years of experience as a radiation and medical oncologist. The Milann Brand where HCG has a 50% stake is run by Dr. Kamini Rao, a recipient of Padma Shri award, India and a pioneer in the field of reproductive medicine in India.Growth drivers<ul><li>Higher prevalence of cancer: Lifestyle changes along with environmental concerns may hasten cancer prevalence in India which is expected to grow at a CAGR of 8% to reach 7.1 million cases in 2020 from near 5.25 mn cases in 2016.</li><li>Underpenetration: With only near 250 comprehensive cancer care centres, India has one of the lowest numbers of cancer centres per million population (0.2 per mn population in India vs. 4.4 per mn population in the US) in the world. The underpenetrated market for cancer care is a major opportunity for companies like HCG.</li><li>Medical Tourism: India is one of the lowest cost destination for cancer treatment, the cost of treatment is near 70% cheaper compared to developed world and 30% cheaper compared to its emerging peers like Vietnam etc. The cost advantage along with the fact that almost of all healthcare providers in India are well versed in English, makes it one of the sought after medical tourism destination in the world. </li><li>Infertility- high growth vertical: Infertility treatment market has grown at a CAGR of 18% in the last decade and it may continue its momentum going ahead as In Vitro Fertilization (IVF) market is highly under penetrated in India with only 1% of 27 mn couple coming forward for evaluation.</li></ul>Our View<ul class="ember-tether-target ember-tether-element-attached-top ember-tether-element-attached-left ember-tether-target-attached-top ember-tether-target-attached-right"><li>Aggressive expansion may help the revenue to grow at a CAGR of 19% to reach Rs1000 Cr (USD 149 mn) by FY19e from FY16. The company expects to add 9 new cancer care centres and 3 new Milann centres by FY18e.</li><li>We expect 21 % CAGR growth in EBITDA to reach Rs 164 Cr (USD 24 mn) by FY19e in spite of volatility in margins as some new centres may take some time for break even. The growth may come from an improvement in EBITDA margin of older centres which commenced operations between FY13-FY16.</li><li>The company has been PAT –ve in the past due to its aggressive expansion. However, we expect the company to become PAT +ve by FY19e.</li></ul>Vendor financing-A unique advantageThe company has a unique method of funding its expansion. Medical equipment that accounts for nearly 70% of total CapEx for a new hospital, are funded by vendor financing rather than outright purchase. By doing this, the company has an advantage of deferring its debt obligation towards its medical equipment by 3 years. This helps in alleviating substantial cash flow strain on the new hospital till it breaks even ( 6 months-2 yrs depending on patient footfalls). This also helps in the individual hospital to remain sustainable on a stand-alone basis and needs very little financial assistance from the corporate.Key Risks<ul><li>The key risk to our projection is underperformance from new cancer centres which may force the company to slow down its expansion pipeline. This may impact company’s profitability as well.</li><li>The promoter shareholding is only 25% of outstanding equity, this provides very little room for the management to raise additional equity. However, the management at the moment does not intend to dilute equity in the near term and will opt for debt and vendor finance for future expansion.</li><li>Vendor financing which constitutes near 65% of the total debt for the company at Rs. 155 Cr (USD 23mn) is dollar denominated. Any depreciation of INR vs USD may increase the financing cost and may also have an adverse impact on the cash flow of the firm.</li></ul>The company trades at an EV/EBITDA of 21x FY17e, 20.95x FY18e EBITDA, 15x FY19e EBITDA and Market cap to sales of 3x FY17e sales, 2.5 x FY18e sales and 2x FY19e sales. Although the growth drivers are intact we believe the valuation is expensive. However, the sector has historically traded at a premium in India due to its growth visibility and under penetration. This is evidenced from a historically rich valuation multiples awarded to Apollo Hospital Enterprise, a peer.

HealthCare Global Enterprises Limited (HCG IN) is a speciality healthcare provider with a focus on cancer and infertility treatment. It is the largest provider of cancer care in India with 19 comprehensive cancer care centres under its “HCG” brand. It is also one of the leading providers of infertility treatment under the “Milann” brand. The HCG Enterprise is run under the helm of Dr. AjaiKumar, a doctor (promoter) who is the Chairman and CEO of the company. He has over 40 years of experience as a radiation and medical oncologist. The Milann Brand where HCG has a 50% stake is run by Dr. Kamini Rao, a recipient of Padma Shri award, India and a pioneer in the field of reproductive medicine in India.Growth driversHigher prevalence of cancer: Lifestyle changes along with environmental concerns may hasten cancer prevalence in India which is expected to grow at a CAGR of 8% to reach 7.1 million cases in 2020 from near 5.25 mn cases in 2016.Underpenetration: With only near 250 comprehensive cancer care centres, India has one of the lowest numbers of cancer centres per million population (0.2 per mn population in India vs. 4.4 per mn population in the US) in the world. The underpenetrated market for cancer care is a major opportunity for companies like HCG.Medical Tourism: India is one of the lowest cost destination for cancer treatment, the cost of treatment is near 70% cheaper compared to developed world and 30% cheaper compared to its emerging peers like Vietnam etc. The cost advantage along with the fact that almost of all healthcare providers in India are well versed in English, makes it one of the sought after medical tourism destination in the world. Infertility- high growth vertical: Infertility treatment market has grown at a CAGR of 18% in the last decade and it may continue its momentum going ahead as In Vitro Fertilization (IVF) market is highly under penetrated in India with only 1% of 27 mn couple coming forward for evaluation.Our ViewAggressive expansion may help the revenue to grow at a CAGR of 19% to reach Rs1000 Cr (USD 149 mn) by FY19e from FY16. The company expects to add 9 new cancer care centres and 3 new Milann centres by FY18e.We expect 21 % CAGR growth in EBITDA to reach Rs 164 Cr (USD 24 mn) by FY19e in spite of volatility in margins as some new centres may take some time for break even. The growth may come from an improvement in EBITDA margin of older centres which commenced operations between FY13-FY16.The company has been PAT –ve in the past due to its aggressive expansion. However, we expect the company to become PAT +ve by FY19e.Vendor financing-A unique advantageThe company has a unique method of funding its expansion. Medical equipment that accounts for nearly 70% of total CapEx for a new hospital, are funded by vendor financing rather than outright purchase. By doing this, the company has an advantage of deferring its debt obligation towards its medical equipment by 3 years. This helps in alleviating substantial cash flow strain on the new hospital till it breaks even ( 6 months-2 yrs depending on patient footfalls). This also helps in the individual hospital to remain sustainable on a stand-alone basis and needs very little financial assistance from the corporate.Key RisksThe key risk to our projection is underperformance from new cancer centres which may force the company to slow down its expansion pipeline. This may impact company’s profitability as well.The promoter shareholding is only 25% of outstanding equity, this provides very little room for the management to raise additional equity. However, the management at the moment does not intend to dilute equity in the near term and will opt for debt and vendor finance for future expansion.Vendor financing which constitutes near 65% of the total debt for the company at Rs. 155 Cr (USD 23mn) is dollar denominated. Any depreciation of INR vs USD may increase the financing cost and may also have an adverse impact on the cash flow of the firm.The company trades at an EV/EBITDA of 21x FY17e, 20.95x FY18e EBITDA, 15x FY19e EBITDA and Market cap to sales of 3x FY17e sales, 2.5 x FY18e sales and 2x FY19e sales. Although the growth drivers are intact we believe the valuation is expensive. However, the sector has historically traded at a premium in India due to its growth visibility and under penetration. This is evidenced from a historically rich valuation multiples awarded to Apollo Hospital Enterprise, a peer.

HealthCare Global Enterprises (HCG)- A Niche Play in Burgeoning Indian Healthcare Sector

India

HealthCare Global Enterprises Limited provides medical and surgical hospital services. The Hospital offers cancer care, chemotherapy, cyberknife surgery, surgical, radiation, and medical oncology services. HealthCare Global Enterprises operates worldwide.

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HealthCare Global Enterprises (HCG IN)

HealthCare Global Enterprises (HCG)- A Niche Play in Burgeoning Indian Healthcare Sector

HealthCare Global Enterprises Limited (HCG IN) is a speciality healthcare provider with a focus on cancer and infertility treatment. It is the...

Das Capital Management and Advisors

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