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Rainbow Children's Medicare IPO opens on 27th April: Should you Apply?

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Rainbow Children's Medicare IPO

Rainbow Children's Medicare Limited IPO opens for subscription on the 27th April. The company is looking to raise up to Rs 1,580.85 crore through the public issue. 

Rainbow Children's Medicare IPO Details:

Rainbow Children's Medicare IPO Date: 27 April - 29 April 2022

Rainbow Children's Medicare IPO Price band: Rs 516 - Rs 542

Rainbow Children's Medicare IPO Issue Size: Rs 1518 crore - Rs 1581 crore (Fresh Issue of Equity shares aggregating up to Rs 280 crore and Offer for sale of Rs 1300 crore)

Reservation: QIB 50%, Retail - 35%, NII 15%

Post Issue Implied Market Cap: Rs 5,251 crore - Rs 5,501 crore

Minimum Investment: Rs 14,634

Employee Reservation: 300,000 Shares

Bid lot: 27 shares, and in multiples of 27 shares

Rainbow Children's Medicare IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

  • General corporate purposes.
  • The early redemption of NCDs issued by the Company, in full.
  • Capital expenditure towards setting up of new hospitals and purchase of medical equipment for such new hospitals.

Rainbow Children’s Medicare IPO: About the company

  • Rainbow Children’s Medicare Limited (RCML) was incorporated in 1998, and it is a leading multi-specialty pediatric and obstetrics and gynecology hospital chain in India.
  • The company operates 14 hospitals and 3 clinics in 6 cities with a total bed capacity of 1500 beds (30 September 2021).
  • RCML has the highest hospital beds count among comparable players in the maternity and pediatric healthcare delivery sector (31 March 2021).
  • Their core specialties are pediatrics which includes newborn and pediatric intensive care, pediatric multi-specialty services, pediatric quaternary care, and obstetrics and gynecology. 
  • It follows a hub-and-spoke model in Hyderabad, with their Banjara Hills hospital (comprising 250 beds) being the hub and 4 spokes at 4 locations in Hyderabad.
  • As of September 30, 2021, the company had 602 full-time doctors and 1,686 part-time/visiting doctors.

Rainbow Children’s Medicare: Key Specialties

Pediatric Services - Offer a comprehensive range of healthcare services for children from birth all through their childhood and adolescent years. According to the CRISIL Report, they are one

of the few pediatric-focused hospital chains in South India.

Women care - They provide women's care services at their hospitals under the 'Birthright' initiative, through which they offer highly specialized maternity and perinatal care to achieve safe delivery and healthy babies.

Industry Outlook

  • CRISIL Research estimates the Indian healthcare delivery market to reach Rs 5 lakh crore in value terms by the end of FY22, with growth being contributed by a low base and the pent-up demand from deferred treatments in FY21.
  • The Healthcare delivery industry to grow 15-17% over the next four years.
  • The government has raised its healthcare budget for FY22 to Rs 71,200 crore, although the incremental allocation in FY21 and FY22 is more for COVID-19 related expenditure.
  • The long-term goal is to raise its healthcare spending to 2.5% of GDP by 2025 under the National Health policy 2017 from the current 1.3% of GDP.

Financials

  • The revenue reported by the company for FY19, FY20, and FY21 is Rs 542.79 crore, Rs 719.39 crore, and Rs 650.05 crore, respectively. The revenue has increased 32.5% in FY20 but declined 9.64% in FY21.
  • The EBITDA for FY19, FY20, and FY21 is Rs 156.87 crore, Rs 207.37 crore, and Rs 173.10 crore, respectively.
  • The net profit for the same period is Rs 44.59 crore, Rs 55.34 crore, and Rs 39.57 crore, respectively. The net profit margin has declined from 8.21% in FY19 to 6.09% in FY21.
  • The average EPS and RoNW for the last three years were 5.06 and 11.52%, respectively.
  • The expenses relating to medical consumables and pharmacy items consumed amounted to Rs 103.26 crore, Rs 105.31 crore, and Rs 80.21 crore in FY21, FY20, and FY19, respectively, representing 17.08%, 16.55%, and 16.25% of its total expenses, respectively.
  • For FY21, FY20, and FY19, purchases attributable to the five largest suppliers accounted for Rs 28.85 crore or 29.62%, Rs 28.79 crore or 25.19%, and Rs 17.67 crore or 21.75%, respectively, of their total purchases of pharmaceuticals and medical consumables.

Listed Peers

  • Rainbow Children’s Medicare has many listed peers that include established names like Apollo Hospitals Enterprise, Fortis Healthcare, Narayana Hrudalaya, Max Healthcare Institute, and recently listed Krishna Institute of Medical Sciences.
  • In terms of revenue, Apollo Hospitals has the highest revenue of Rs 10,605 crore, while Rainbow Children’s Medicare has the lowest revenue - Rs 660.31 crore.
  • The Earning Per Share (EPS) is highest for Krishna Institute of Medical Sciences, followed by Apollo and Rainbow Children's Medicare.
  • Krishna Institute of Medical Sciences has the highest RoNW of 23.74%, followed by Rainbow Children's Medicare with a RoNW of 8.88%.

USPs

Ability to conceptualize, create and operate specialized children’s hospitals - Company believes that its specialization in pediatric care and the ability to conceptualize, create and operate children’s hospitals are critical to its success. One of the biggest differentiators of their hospital from adult hospitals is the children-centric atmosphere. 

Leading pediatric multi-specialty healthcare chain - They are one of India's largest multi-specialty pediatric care providers (based on hospital beds, as of March 31, 2021), with a presence across various specialties such as neurology, nephrology, gastroenterology, oncology, and cardiology.

Comprehensive perinatal care provider - Their perinatology division has worked cohesively over the years to optimize outcomes in many high-risk pregnancies such as multiple pregnancies, extreme prematurity, surgically correctable fetal anomalies, and growth restrictions.

Hub-and-spoke model - Under this model, their super-specialty doctors based at their hub hospital can reach out to the larger community and cover a larger catchment area. This model has enabled them to evolve over the past two decades from a single secondary care hospital in Hyderabad to six hospitals in the city.

Growth Potential

Strengthen tertiary and quaternary pediatric services - The company believes that there is a great opportunity for them to expand their quaternary care operations. They intend to increase the scope of the NAPE program across all their network hospitals to gain further referrals.

Grow comprehensive perinatal services - The company started perinatal services in 2007 by providing comprehensive perinatal care which was backed by teamwork, round the clock availability. They will focus on providing comprehensive obstetrics and gynecology services at all current and future hospitals, which will help them in enhancing their patient and revenue base.

Initiatives to drive performance efficiencies - It will continue to explore means to enhance performance efficiencies to reduce the cost of healthcare delivery to make it affordable for patients, and also contribute to the growth in profitability. 

Digital healthcare initiatives - Their digital strategy is focused on enabling them to provide customized healthcare services for target customers and to digitize processes to significantly improve the in-hospital customer experience. They plan to increase the scale of reach to patients through the digital ecosystem.

Risks

Dependency on medical professionals - The operations depend on the skills, efforts, and experience of medical professionals -doctors, and nurses at hospitals. The performance and the execution of their business strategies depend substantially on the ability to attract, recruit and retain doctors in specialties. If they are unable to attract or retain medical professionals as required, they may not be able to maintain the quality of the services, which will impact the business.

Engage doctors primarily on a consultancy service - The majority of their doctors in key specialties have full-time, exclusive retainer ship arrangements with hospitals and are not under employment contracts. Concerning their part-time doctors, there is no assurance that they will continue to provide services to us or devote the whole of their time to their hospitals.

Fail to manage growth - Their growth depends on their ability to build, develop and manage additional hospitals and to expand and improve existing hospitals. There is no assurance that growth strategies will be successful. Also, there is no assurance that they will be able to successfully integrate acquisitions or overcome the challenges arising from acquisitions and investments.

Rainbow Children's Medicare IPO Review:

  • Recovering revenues: Revenue increased at a steady 9.4% per year between FY19 and FY21. The company has seen a robust 25% YoY growth in revenue in Apr-Dec 21 period. 
  • Exceptional Profit growth: It has posted negative 5.8% annualised growth in Net Profit between FY19- 21. The company saw an exceptional 81% rise in net profit between Apr- Dec 21 period, driven by Covid-19 hospitalisations.
  • Healthy margins: Profit margins had taken a hit in FY21 at just 6.09% in FY21. In the Apr-Dec 21 period, PAT margins rose back to 16.6% aided by hospitalisations during the second wave. 
  • Reasonable valuations: At the higher end of the price band, Rainbow Children’s Medicare IPO is priced at 43 times FY22 annualised EPS. This is cheaper compared to Apollo Hospitals (109 times), Narayana Hrudayalaya (171 times) , Max Healthcare (148 times). Notably, Rainbow Children’s Medicare has reported better Return ratios as compared to these peers in the previous year.
  • Recommendation: Given factors such as a focus on specialized services, strong clinical expertise, strong profitability, healthy return ratios, and reasonable valuations, analysts remain “Positive” on the long-term prospects of this issue. 
  • Key concerns: Increased competition and sustainability of exceptional financial performance in Apr-Dec 21 period remain key concerns.  
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