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Krishna Institute of Medical Sciences Ltd (KIMS) has grown from a 200 bed single hospital at Nellore (in 2000) to a chain of multi-specialty hospitals (3,064 beds) offering quaternary care across a wide gamut of therapies. Today the KIMS hospital chain consists of 9 assets predominantly located in Andhra Pradesh (AP) and Telangana with growth coming from organic expansion and strategic acquisitions. As per CRISIL, their flagship hospital at Secunderabad (1,000 beds) is one of the largest single location private hospitals in India (excluding medical colleges). Apart from this, other greenfield assets are located at Rajamundry (180 beds, partly leased), Srikakulam (200 beds), Kondapur (200, leased). Ongole (FY2017, 350 beds), Vizag (FY2019, 434 beds, O&M), Anantapur (FY2019, 250 beds) and Kurnool (FY2020, 200 beds) are the hospitals added through acquisition.

KIMS has a strategic focus on healthcare in southern India with

* a presence across high margin Tier I and Tier II/III markets in AP and Telangana.

* “affordable” (~20-30% lower prices than peers) quality healthcare

* a comprehensive range of multi-disciplinary integrated healthcare services (25+ specialties and super specialties).

* good medical infrastructure and modern technology

* KIMS strong brand equity, and

* cluster based expansion in adjacent markets of Central India (Indore, Aurangabad, Raipur & Nagpur), Odisha (Bhubaneshwar), Karnataka (Bengaluru & greater Karnataka) and Tamil Nadu (Chennai)

augurs well for sustaining high growth with strong profitability. Over the period FY18-21 revenues / EBITDA / PAT have grown at a 3-year CAGR of 20.4% / 114.0% / 105.2% to Rs. 1,329.2 cr/ Rs.370.9 cr/ Rs.205.5 cr respectively.

FY21 ARPOB stood at Rs. 20,609 (2-Year CAGR of 6.0%) while occupancy rates were impacted slightly to 78.6% (-230 bps Y-o-Y) on account of the pandemic. Over the same period EBITDA and net margins improved to 27.9% and 15.5% respectively, while return ratios ROE and ROCE augmented to 23.8% and 18.4% respectively. We expect KIMS to expand the network bed capacity to 3,800 (+1,200 beds) by FY24 through a mix of brownfield and greenfield expansions while incurring a capex of Rs. ~815.8 cr.

As a result, we expect overall revenues / EBITDA / PAT to grow at a CAGR of 15.8% / 12.9% / 15.2% to Rs. 2,067.1 cr / Rs.534.3 cr / Rs.314.4 cr, respectively, over the forecast period. We have modeled a marginal 1% growth in ARPOB, while occupancies are expected to climb to 80.2%. Considering the gestation period required to reach optimum utilization, EBITDA and net margins are expected to decline by 250 bps and 50 bps to 25.8% and 15.2%, respectively, over the forecast period. Consequently, return ratios RoE and RoIC are expected to decline by 1,096 bps and 388 bps to 16.8% and 29.9%, respectively by FY24.

From the proceeds of the fresh issue (Rs. 200 crs), KIMS is looking to repay Rs. 150 crs of its total debt outstanding and the remaining funds are to be used partly for capex and general corporate purposes. Given the strong internal accruals, we expect KIMS to be net debt free in FY22. Going forth, KIMS may raise debt for funding its capex. However, the Net Debt / Equity is not likely to exceed 0.3x.

We value the stock at Rs. 1,275 (17x FY24 EV/EBITDA). This represents a potential upside of 55% from the IPO price of Rs. 825 per share (upper band) over the next 24 months. We recommend a SUBSCRIBE for long term investing.

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