Fiscal 2022 working gives comfort while resurgence of COVID-19 is a cause for concern.
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RAINBOW OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 280 Cr (51,66,052 shares) |
| Offer for Sale | 2,40,00,900 Shares (Rs 1300 Cr) |
| Face Value | Rs 10 |
| Price Band | Rs 516 – 542 |
| Mkt/Bid Lot | 27 Nos. |
| Implied M-Cap | Rs 5,501 Cr |
| Implied Eq-Cap | Rs 101.50 Cr |
| Implied Free Float | 50.17% |
| Lead Manager | Kotak Mahindra, JP Morgan and IIFL Sec |
| Registrar | KFin Technologies |
| Listing At | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 27-Apr-2022 | Closing : 29-Apr-2022 |
| Allotment : 5-May-2022 | Refunding : 6-May-2022 |
| DematCredit : 9-May-2022 | Trading : 10-May-2022 |
The Offer
The Hyderabad-based Rainbow Children’s Medicare Ltd is making an initial public offer of Rs 1,580 Cr which translates into 2,91,66,951 equity shares at the cap price. The issue consists of a fresh issue of Rs 280 Cr (51,66,052 equity shares) from the company and an Offer for Sale of 2,40,00,900 equity shares (Rs 1,300 Cr) from the promoters and private equity investors. The offer is being made through the book-building route with a price band of Rs. 516-542 for Rs 10 paid up share.
Applicants should bid for a minimum lot of 27 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on May 10, 2022. Investment bankers Kotak Mahindra Capital, J.P. Morgan India and IIFL Securities are acting as managers to the offer and KFin Technologies has been roped in as the registrar to the issue. The bidding opens on Wednesday, April 27 and closes on Friday, April 29, 2022.
The Company proposes to utilise the proceeds from the fresh issue towards early redemption of NCDs issued by the company to CDC Emerging Markets Ltd (Rs 40 Cr); setting up of new hospitals and purchase of medical equipments (Rs 170 Cr) and general corporate purposes (balance amount net of issue expenses).
Lineage
In 1998 when Rainbow was incorporated, Ramesh Kancharla, Prasad S V Vankayalapati and D Suresh were the subscribers to the MoA with 100 shares each. However, as per the present offer document (RHP), Dr. Ramesh Kancharla is the original promoter of the company. And, Dr. Dinesh Kumar Chirla and Dr. Adarsh Kancharla have become promoters in the year 2013 and 2020 respectively. In 2013 British International Investment plc (formerly known as CDC Group plc) came in as a private equity investor and has remained invested for nine long years.
Starting its first hospital in 1999, Rainbow is now a multi-specialty pediatric and obstetrics and gynecology hospital chain in India, operating 14 hospitals and three clinics in six cities, with a total bed capacity of 1,500 beds. According to the CRISIL Report Rainbow had the highest number of hospital beds amongst comparable players in the maternity and pediatric healthcare delivery sector, as of March 31, 2021.
Key Management
Founding promoter, Dr. Ramesh Kancharla (60), who has over 23 years of experience in the United Kingdom and India in the field of pediatrics, pediatric gastroenterology, liver diseases and liver transplantation, is the Chairman and Managing Director of the company. Another promoter, Dr. Dinesh Kumar Chirla (52), who is a trained neonatologist and has worked in children’s hospitals in Australia and United Kingdom for seven years, is a Whole-time Director.
Stakeholders
Of the pre-IPO equity capital of Rs 96.33 Cr, the promoters and their associates hold 62.19%. British International Investment (BII) Group, controls 30.45%. The balance 7.36% is held by employees and others. Post public offer, the promoter group will have 49.83%, BII group will control 14.45% and public will hold 35.72%.
Business Track
In the initial years, Rainbow focused on establishing its capabilities and reputation as a leading provider of pediatric care. Leveraging the Rainbow brand, which was already well recognized in pediatrics, the company expanded into obstetrics and gynecology in 2007.
The company offers comprehensive healthcare services across its core specialties of (i) pediatrics, including newborn and pediatric intensive care, pediatric multi-specialty care services and pediatric quaternary care, where it also performs multi-organ transplants in children, and (ii) obstetrics and gynecology, including normal and complex obstetric care, multi-disciplinary fetal care and perinatal genetic care, as well as fertility treatment.
Rainbow follows a doctor engagement model whereby most of its core specialists work exclusively at Rainbow hospitals on a full-time retainer basis. This model ensures that most of its core specialists are available 24/7 on a roster basis at Rainbow hospitals, which is particularly important for children’s emergency, neonatal and pediatric intensive care services. As of December 31, 2021, Rainbow had 641 full-time doctors and 1,947 part time/visiting doctors.
Financial Track
Under normal circumstances Rainbow has put up impressive working performances. In two years between fiscal 2018 and fiscal 2020, the company’s revenue surged from Rs 401 Cr to Rs 719 Cr and net profit increased from Rs 36 Cr to Rs 65 Cr. Nevertheless, the pandemic-inflicted fiscal 2021 saw the revenue sliding to Rs 650 Cr and the bottom line crashed to below Rs 40 Cr. The company has fared exceedingly well during the first nine months of fiscal 2022. Revenue has leapt to Rs 761 Cr. EBIDTA margin has surged from 26.2% to 34.8%. Nine months’ net profit has zoomed to Rs 126 Cr which is attractive against the post-IPO capital base of Rs. 101.50 cr.
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Rainbow Child Consolidated Financials (in Cr) |
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| Period Ended |
Dec-21 |
Mar-21 | Dec-20 | Mar-20 |
Mar-19 |
| Months |
9 |
12 | 9 | 12 |
12 |
| Revenue |
761.31 |
650.05 | 486.17 | 719.39 |
542.79 |
| Operating Profit |
256.74 |
162.83 | 130.54 | 197.03 |
148.51 |
| OPM% |
33.7 |
25 | 26.9 | 27.4 |
27.4 |
| Other Income |
12.75 |
10.26 | 8.12 | 10.35 |
8.35 |
| EBIDTA |
269.49 |
173.1 | 138.67 | 207.37 |
156.87 |
| EBIDTA % |
34.8 |
26.2 | 28.1 | 28.4 |
28.5 |
| Interest |
36.93 |
44.06 | 31.25 | 44.61 |
39.02 |
| Depreciation |
60.98 |
73.34 | 53.21 | 69.41 |
60.32 |
| Net Profit |
126.41 |
39.57 | 38.53 | 55.34 |
44.59 |
| Equity (Implied) |
101.50 |
101.50 | 54.90 | 54.90 |
54.90 |
| Reserves (Implied) |
895.2 |
768.79 | 389.62 | 350.5 |
317.25 |
| Borrowing |
40.69 |
47.97 | 46.97 | 57.68 |
52.64 |
| Fixed Assets |
819.4 |
798.1 | 792.5 | 741.3 |
721.4 |
Valuation
The IPO cap price of Rs 542 discounts the company’s fiscal 2021 earnings as high as 139 times. However, if the first nine months’ working was any indication, fiscal 2022 earnings may bring down the P/E multiple below 33x which compares well with other multi/super specialty hospital stocks.
Even though fiscal 2022 performance exudes optimism, one cannot overlook the following points. Post-offer for sale, the promoters will hold a minority stake of less than 50%. The cost of residual holding for the promoters and the private equity investors, who would collectively control more than 64% equity, will be extremely negative which could pose threat to the share price prospects post lock-in period. Though compares well with other heavyweight hospital chains, Rainbow’s valuation is indeed steep as compared to a fundamentally more strong hospital stock like Kovai Medical.
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HOW RAINBOW COMPARES WITH SELECT HOSPITAL STOCKS |
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Financials |
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| (Amount in Cr) |
Rainbow |
Apollo | KIMS |
Kovai Med |
| Market Cap |
5691 |
69226 | 10957 |
1871 |
| Borrowing |
48 |
2495 | 240 |
559 |
| Fixed Assets |
798 |
6631 | 805 |
1078 |
| Revenue |
650 |
10560 | 1330 |
690 |
| Other Income |
10 |
45 | 10 |
12 |
| EBIDTA |
173 |
1182 | 381 |
205 |
| Interest |
44 |
449 | 32 |
31 |
| Net Profit |
40 |
137 | 204 |
77 |
| Equity Cap |
102 |
72 | 80 |
11 |
| Reserves |
769 |
4523 | 1048 |
499 |
| Acc. Loss |
0 |
0 | 64 |
0 |
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Stock Features |
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| Current Price (Rs) |
542 |
4815 | 1369 |
1710 |
| Face Value (Rs) |
10 |
5 | 10 |
10 |
| Book Value |
86 |
320 | 133 |
466 |
| Promoter Stake % |
49.8 |
29.3 | 38.8 |
55.7 |
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Profitability |
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| OPM % |
25.1 |
10.8 | 27.9 |
28.0 |
| Net Margin % |
6.0 |
1.3 | 15.3 |
11.0 |
| Cash EPS |
11.12 |
50.39 | 33.70 |
132.83 |
| Earnings Per Share |
3.90 |
10.53 | 25.01 |
70.66 |
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Return |
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| RONW % |
8.0 |
3.0 | 20.6 |
15.2 |
| ROCE % |
18.3 |
9.5 | 25.2 |
12.8 |
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Discounting |
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| Price/Earnings |
139.0 |
457.4 | 54.7 |
24.2 |
| Price/Cash EPS |
48.7 |
95.6 | 40.6 |
12.9 |
| Price/Book Value |
6.3 |
15.1 | 10.3 |
3.7 |
| Price/EBIDTA |
32.9 |
58.6 | 28.8 |
9.1 |
| Price/Revenue |
8.8 |
6.6 | 8.2 |
2.7 |
| Price/Fixed Assets |
7.1 |
10.4 | 13.6 |
1.7 |
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Distribution |
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| Dividend % |
0 |
60 | 0 |
30 |
| Yield % |
0 |
0.1 | 0 |
0.2 |
| Pay-out % |
0 |
31.5 | 0 |
4.2 |
Concern
- COVID-19 pandemic has affected the company’s business operations in the recent past and any resurgence of the pandemic may curtail the operations again which would affect the share price in the secondary market.
- Company has not yet entered into any definitive agreements for the new hospitals proposed to be set up at a capex of Rs 170 Cr utilizing the IPO proceeds.