{"id":1019,"date":"2020-08-16T21:34:00","date_gmt":"2020-08-16T21:34:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1019"},"modified":"2020-08-16T21:34:00","modified_gmt":"2020-08-16T21:34:00","slug":"healthcare-global-enterprises-ltd-data-is-god-updates","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1019","title":{"rendered":"Healthcare Global Enterprises Ltd.- Data is God- Updates"},"content":{"rendered":"
\n<\/p>\n
\nIn my last post on Healthcare Global enterprise (Click here)<\/a> i forgot to
\ncover the valuation exercise of Strand life sciences in the final chapter on Financial analysis of HCG.
\nOne reader pointed this out in the comment section. So i have updated this aspect in that article.
\nFurther some readers have put the query as to why we assign high valuation
\nmultiples to book value for some stocks and not for others. So i have also
\nadded a short note on this along with some other changes in that chapter. So i am
\nreproducing the updated chapter here (updates highlighted in red):<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFinancial Analysis<\/span><\/u><\/b><\/span><\/div>\n
\n<\/div>\n
\nIt may appear on the surface that HCG is doing badly
\noperationally when one looks at its financial performance- Turnover of Rs. 1100
\n(hit by Covid) cr in 2019-20 and Losses before tax of Rs. 119 cr. But just a
\nlittle bit of scratching of the surface and things will unfold into a new
\ndimension. HCG has done massive expansions in last 3 years by investing some
\n700 cr in creating new facilities across India. Numbers of beds under its
\nnetwork are at 2071 in Mar-20 as compared to 1364 in 2017. Its gross block is
\naround 1200 cr in 2020 as compared to some 600 cr in 2017. It was a profitable
\ncompany in 2017 with NP of 23 cr on revenues of 700 cr. Now, I think you can
\neasily guess why its performance could have suffered after that- because of
\ncosts related to new expansions hitting the profits with relatively much lesser
\ngrowth in topline. Like, its topline growth is around 50% from 700 cr to 1100
\ncr however depreciation is at 104 cr in 2020 (excluding lease impact) vs 57 cr
\nin 2017, interest cost of 82 cr vs 23 cr, Employee cost at 208 cr vs 121
\ncr. <\/span>Further there is an
\nimpact of Rs. 40 cr due to implementation of new lease standard 116 otherwise
\nthe losses are much lower than the reported figure of 119 cr (loss before
\ntax). <\/span>So as maturity profile
\nof recently commissioned hospitals is low hence they are not contributing much
\nto the topline but their expenditures are hitting P&L badly as turnover
\ngrowth is just 50% but most of the expenditures have been grown up by more than
\n100%.<\/span><\/span><\/div>\n
\n<\/div>\n
\nIn Healthcare there is high operating leverage as most of the
\nexpenses are fixed so when a hospital is new, revenue will be lower but fixed
\ncharges like depreciation\/lease rentals of building, machinery, staff payments
\nhit hard. Healthcare uses very expensive medical equipment so upfront fixed
\nexpenses are high so this gives a false impression of losses. But as most
\ncharges are fixed so most of the incremental revenue goes to bottom line. We
\ncan look at the superlative performance shown by NH this year which will show
\nthe operation of operating leverage. I am taking the performance of 9 months
\nending Dec-2019 to eliminate the Covid impact in Mar-2020. Up to Dec-19 the
\ntopline of NH was Rs. 2385 cr vs 2096 cr growth of 14%. But its NP was 107 cr
\nvs 22 cr\u2026a massive jump of 500% as compared to topline growth of just 14%. And
\nstock price of NH increased from 200 to 400 in Jan-2020 (click here for the post on NH)<\/span><\/a>. We can see similar impact of
\noperating leverage on the performance of HCG anytime in this year.<\/span><\/span><\/div>\n
\n<\/div>\n
\nFor valuation, EBITDA can be used but as it has just completed a
\nmajor expansion in last 3 years so I do not think it is wise to try to assign a
\nvaluation to it even on the basis of EBITDA. I have seen people using this
\nmetric blindly in all situations. Similarly I have seen attempts to value HCG
\non the same basis. But as I have told you hospitals are a very different
\nbusiness and it is not easy to apply traditional valuation models on it. Like, for
\nEBITDA based valuation we can see that the value will be heavily distorted by
\nthe presence of newly commissioned hospitals (large numbers) which are having
\nnegative\/break even EBITDA as of now. So these facilities which do not add
\nanything to the EBITDA of the company will not get any valuation at all!! So if
\nwe try to value HCG on the basis of EBITDA (it shows some 135 cr for Hospital
\nbusiness in 2019, 121 cr in 2020) then the result will give extremely wrong
\nvaluation because it will not assign any valuation to the loss making\/break
\neven hospitals. In fact, loss making hospitals will further reduce the overall
\nEBITDA of the company and this will result in the assigning of negative value
\nto a hospital like -50 cr for its Nagpur hospital. But can a hospital has
\nnegative value or a zero value??<\/span><\/span><\/div>\n
\n<\/div>\n
\nSo I think the better
\napproach to value these growing hospital chains is- use EBITDA for matured
\nhospitals with positive EBITDA and use replacement cost based or revenue based
\napproach for the loss making\/breakeven facilities. Last year Max healthcare was
\nsold at some 25 times EBITDA. But Cancer hospitals are much more expensive to
\nset up and due to costly equipments the capital cost is very high. Further HCG
\nis a young entity so I would take 30-35 times EBITDA for valuing HCG. Its
\nmature center EBITDA is 160 cr (including IVF business) so at 30 times EBITDA
\nthe value is 4800 cr. I do not
\nhave the value for cost incurred on new hospitals but they have given the debt
\ntaken for new hospitals and the same is 432 cr as on mar-20. We can move ahead
\nwith this figure by adding some value addition in the form of expertise in
\nsetting up\/planning and also in the form of first mover advantage in setting up
\na new hospital in a small city because this acts as a deterrent against new
\ninvestments by competition. I think we can easily take the same at minimum 500
\ncr.<\/span><\/span><\/span><\/div>\n
\nLet\u2019s also try to value on the basis of revenue which is 150 cr
\nfor loss making centers. Max deal has happened at some 2.5 times of revenue
\nthat too of mature hospitals. So I think we can take this at 3-4 times for HCG
\nloss making centers which will take the value at some 450-600 cr which is near
\nto 500 cr we derived on the basis of cost. So Value of Mature hospital 4800 cr+
\nnew hospitals 500 cr-Debt of 700 cr will make the value around 4600 cr. It is
\nvery high compared to the current market cap of Rs. 1600 cr. So let\u2019s try to
\nlower the EBITDA multiple to 20 thinking wrongly that this is due to covid. So
\nat 20 multiple, the value of mature centers excluding debt is 2500 cr and by
\nadding 400 cr (only debt no value addition) for loss making centers the value
\nis 2900 cr still 80% higher than the current market capitalization which shows
\nthat it is way undervalued.<\/span><\/span><\/span>
\n
<\/span>
\nFurther, other comparative players like Narayana and Apollo are trading at 6 times of their book value while HCG is trading at 3 times its book value. The likes of Fortis and Aster are trading cheap (at one time and 3 times) but Fortis is fighting its own set of problems and Aster DM i think gets more than 50% revenues outside India so i have left both. Further, as i have shared earlier Cancer hospitals require more capital investments but still if we take 6 times of book value as the basis the valuation of HCG will be some 3200 cr which is near to our other valuations so we can say that our valuation of HCG is on right track. Some people ask me why for some stocks market pays such a high valuation compared to its book value…5-6 times is a big value. Actually stock valuation is where market sometimes shows great creativity. Like, if we can see low book value in case of hospitals in their infancy is an illusion because hospitals are a high capital investment business so in the initial period (say 4-5 years) there are losses due to the impact of high depreciation and other high fixed expenditures which results in big losses and so reduction in the book value. But this reduction in book value is not real as company is building business and growth catalysts are still intact. And with better performance in future due to operating leverage book value will be restored to normal levels. That’s why in the initial phase market assigns high valuation multiple to book value but as they are matured this valuation multiple is normalized.<\/span><\/span><\/div>\n
\n
<\/span><\/div>\n
\nStrand Valuation<\/span><\/u><\/b><\/span><\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut above valuation of HCG is excluding the stake of 38% in Strand life
\nwhich for me will be one of the biggest growth catalysts. As I have told you
\nearlier there is not much information about the revenues and valuation of
\nStrand. Like, in Feb 2018 Quadria acquired stake in it for 80 cr but how much
\nstake it acquired is not known. But as 38% is with HCG, then there are
\ninvestors like Kiran Shaw, Reddy, and Promoters etc. So I think Quadria much
\nhave acquired somewhere 10%-20%. At 20% the value is some 400 cr and that was 2
\nyears ago. After that Strand has acquired the diagnostic business of USA based
\nQuest in India. But if you ask me sometimes it is better not to try evaluating
\nsomething as revolutionary as Strand.<\/span><\/span><\/span><\/div>\n
\n
<\/span><\/div>\n
\nOnce I was talking to a friend who wanted to make a career in
\nAstrology. During our discussions I shared my view about Astrology that it has
\nlost its credibility because it tries to answer (and change) everything.
\nFurther, most of the things look beyond its reach and illogical keeping in view
\nits current technical\/theoretical advancements. Like the sun we see in the sky
\nis the sun that existed 8 minutes ago because it takes around 8 minutes for the
\nlight to travel from sun to earth. Same is for all the stars. A person comes
\ninto this world 9 months before taking birth. Similarly I always feel that
\nequity investing starts to behave like Astrology when it tries to put a value
\non everything. Some things are unfolded only on time and it is better not to
\nmake a crude guess of what may unfold especially with outdated techniques.
\nCAGR, DCF etc. have outlived their lives and for emerging businesses they have
\nvery limited utility. We need something better now (Even for settled businesses
\ntargets announced by brokerage houses do not hit 95% of times). The likes of Quadria
\nhas acquired stake in Strand so they have to put a value on it but most of the
\ntimes that value is purely arbitrary and does not have much perspective. That\u2019s
\nwhy we see cases like Quess Corporations where Thomas Cook has made astonishing
\nreturns. Thomas cook invested in Quess in 2013 and by 2020 the value of its
\ninvestment increased by some 25 times!! But in 2013 nobody could guess that by
\n2020 the same can be 25 times. In fact everybody would have laughed at. So the
\nprice paid by Thomas cook was just the funds needed by Quess for their future
\ngrowth and so the valuation was arrived for the sake of valuation not out of
\nsome precise calculation. Nobody can evaluate a disruption and innovation early
\nin its life. Same thing I feel for Strand and I think it is good that we are
\nnot required to put a value for strand. I only wish for HCG to raise its stake
\nin Strand in the future.<\/span><\/span><\/span><\/div>\n
\n
<\/span><\/div>\n
\nCVC Investments will be a
\ngame changer<\/span><\/u><\/b><\/span><\/div>\n
\nFurther, to make the valuation exercise more confusing the
\ncompany has sold 31% stake to a private equity player CVC at a valuation of
\n1600 cr. So, one can feel that the valuation offered is quite lower. But I
\nthink there may be some valid reasons for this. Main reason can be the
\ndevastating impact of covid on all businesses and healthcare was also badly
\naffected and there are high chances that healthcare will remain stressed due to
\nnegative impacts on the incomes of people and this will hit their capacity to
\nspend on healthcare services. HCG was having a debt of 700 cr (some 30-40% in
\nforeign currency) and with not much help from government for healthcare sector
\nI think even their survival was at stake. So there was high uncertainty in
\nApr-may-2020 about the impact of Covid and this might have affected the debt
\nreduction plans of the management in 2020-21 as Covid will easily wipe out 2-3
\nquarters this year. HCG stock price was beaten down to some 60 levels in
\nMar-20. Hence, management realized the urgency to reduce the debt and this
\nmight be the reason for going for the stake sale. In May-20 price offered was
\n100 which was increased to 130 in June-2020. HCG has got some 500 cr from the
\nstake sale and this they will use for the debt reduction and this will make
\nthings much better for them.<\/span><\/span><\/div>\n
\n<\/div>\n
\nI also think that the present situation created due to Covid
\ncrisis will hit the business of many hospital chains and those with weak
\nbalance sheets will feel the more pain and this may help HCG doing much better
\neven in tough times and we may see some management contracts happening with
\nother local hospital chains. Further, the scope of deferment of cancer care is
\nvery less as compared to other healthcare problems so HCG should not face that
\nmuch difficult time as may be felt by other healthcare services.<\/span><\/span><\/div>\n
\n<\/div>\n
\nHCG is planning to sell its fertility business under Milann
\nbrand which is having revenues of 70 cr. I never liked HCG doing this unrelated
\nbusiness especially when the scope of growth in the core cancer care is so high
\nwhich requires huge capital investments. Actually these types of unrelated
\nacquisitions raise the doubt of fund leakages by the management because why a
\nwise man would attempt this type of adventure when they are hard pressed in
\ntheir core area. Still, I want to give them the benefit of doubt keeping in view
\nthe otherwise good reputation and credibility of the management and the fact
\nthat HCG did this in 2013 way before their IPO and most importantly the
\npresence of marquee investors in the form of IFC, Tamasek, CVC raises the trust
\nfactor to great extent. Now, they have decided to sell this fertility business
\nwhich is a good decision. So I hope that things are going to get better for
\nthem from hereon because HCG has already suffered quite a bit. They went for
\nmassive expansions but were hit badly by the onslaught of Covid. But current
\nvaluations are already discounting (over-discounting) all such sufferings and
\nit is one of the best play on the growth of Genomics, Genomic diagnosis and
\nCancer care in India.<\/span><\/span><\/div>\n
\n<\/div>\n
\n(Views are personal and should not be taken as
\na recommendation for buying or selling a stock. Stock markets are inherently
\nrisky so kindly do your Due Diligence before investing. I am not a certified
\nSEBI Analyst and holding the shares discussed in this Post. reach me at
\noscillationss@yahoo.in).<\/span><\/span><\/div>\n
\n<\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

In my last post on Healthcare Global enterprise (Click here) i forgot to cover the valuation exercise of Strand life sciences in the final chapter on Financial analysis of HCG. One reader pointed this out in the comment section. So i have updated this aspect in that article. Further some readers have put the query as to why we assign high valuation multiples to book value for some stocks and not for others. So i have also added a short note on this along with some other changes in that chapter. So i am reproducing the updated chapter here (updates…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1019","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1019","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1019"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1019\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1019"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1019"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1019"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}