Rainbow Children’s Medicare

Multi-speciality pediatric hospital chain

Success of doctor engagement model has led to high degree of full-time doctor retention across its hospitals

Rainbow Children’s Medicare is a leading multi-specialty pediatric, 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, as of December 31, 2021. Company has the highest number of hospital beds amongst comparable players in the maternity and pediatric healthcare delivery sector, as of March 31, 2021.

Its core specialties are pediatrics, which includes newborn and pediatric intensive care, pediatric multi-specialty services, pediatric quaternary care (including multi organ transplants); and obstetrics and gynecology, which includes normal and complex obstetric care, multidisciplinary fetal care, perinatal genetic and fertility care.

Company established its first pediatric specialty hospital in 1999 in Hyderabad. Since then, under the leadership of Dr. Ramesh Kancharla, its founding Promoter, company has established reputation as a leader in multi-specialty pediatric services, with strong clinical expertise in managing complex diseases. It has also expanded operations to include obstetrics and gynecology services, whereby company offers comprehensive perinatal services to patients.

Pediatric healthcare market in India to grow from Rs 1,01,000 crore as of March 31, 2021 to Rs 2,10,000 crore by the end of the financial year 2026, at a CAGR of 13%.  Company is well placed to benefit from this expected growth in the industry.

Company follows doctor engagement model whereby most of its core specialists work exclusively at hospitals on a full-time retainer basis. This model ensures that most of core specialists are available 24/7 on a roster basis at the hospitals, which is particularly important for children’s emergency, neonatal and pediatric intensive care services. As of December 31, 2021, company had 641 full-time doctors and 1,947 part time/visiting doctors. Successful adoption of this doctor engagement model across hospitals, has led to a high degree of full-time doctor retention (at 81% for the period from April 1, 2019 to March 31, 2021).

Its delivery volume has grown from 10,632 deliveries in the financial year 2019 to 12,582 and 13,287 in the financial years 2020 and 2021, respectively, recording a CAGR of 11.79%. As a result of its unique full-time doctor engagement model and teamwork, approximately 85.00% of deliveries are done by fulltime in-house doctors. Going forward, company is focused on providing comprehensive obstetrics and gynecology services at all its current and future hospitals, which will help in enhancing patient and revenue base.

Company expanded its hospital network and increased its bed capacity from 1,162 beds as of March 31, 2019 to 1,500 beds as of December 31, 2021. Over the same period, company increased the number of hospitals from 10 to 14. Going forward, company is open to expand hospital network through the acquisition of brownfield assets or development of greenfield assets (depending upon the location of the hospital and the timelines to complete the project).

Company  follow a hub-and-spoke model in Hyderabad, with its Banjara Hills hospital (comprising 250 beds) being the hub and four spokes at four locations in Hyderabad, namely Secunderabad, LB Nagar, Kondapur and Hydernagar. At hub hospital, it provides comprehensive outpatient and inpatient care with a focus on tertiary and quaternary care and, at spokes, it provides secondary care in pediatric, obstetrics and gynecology and emergency services. This model has strengthened  market position in and around Hyderabad.

Company plans to increase its reach to patients through a robust digital ecosystem. In the period from April 1, 2020 to March 31, 2021, company conducted over 125,000 outpatient video consultations through its video consultation platform. Out of these video consultations, a significant number were from locations where it does not have a physical presence (within India and abroad). Further, some of the patients who consulted through these video consultations subsequently required further treatment on an inpatient basis as well at its hospitals.

Company’s ARPOB/day (average revenue per occupied bed per day) increased from Rs 40,893 in FY2021 to Rs 45,951 in 9M FY22. Its occupancy rate also increased from 34.23% in FY21 to 46.18% in 9M FY22.

Company intends to expand its quaternary care operations. At Banjara Hills in Hyderabad, Telangana (hub), company commenced providing pediatric quaternary care services in 2019. It plan to build similar capabilities in its hospitals in Bengaluru, Karnataka, Chennai, Tamil Nadu and New Delhi- NCR.

Offer and its objects

The IPO comprise of fresh issue of equity shares worth up to Rs 280 crore and an offer for sale of Rs 1300.84 crore on upper price band, by existing shareholders- Dr. Ramesh Kancharla, Dr. Dinesh Kumar Chirla, Dr. Adarsh Kancharla, British International Investment plc, CDC India and Padma Kancharla.

Price band for the IPO is Rs 516 to Rs 542 per equity share of face value Rs 10 each.

Objectives for the fresh issue are- Early redemption of NCDs issued by the Company to CDC Emerging Markets of Rs 40 crore, Capital expenditure towards setting up of new hospitals and purchase of medical equipment for such new hospitals of Rs 170 crore and remaining amount will be used for General corporate purposes.

Promoters of the Company are Dr. Ramesh Kancharla, Dr. Dinesh Kumar Chirla and Dr. Adarsh Kancharla. Promoters and promoter group holds an aggregate of 59,912,3 84 equity Shares, aggregating to 62.19% of the pre-Offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 50.43%.

The issue, through the book-building process, will open on 27 April 2022 and will close on 29 April 2022.

Strengths

Company has demonstrated the ability to conceptualize, create and operate specialized children's hospitals. Each of its hospitals also have a designated child play area and other entertainment in the patient rooms which comforts the children recovering from treatment.

It is 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. In addition, company provide complex multi-specialty tertiary intensive care at its hub hospitals, which provides a significant competitive advantage.

Company has a leadership position in pediatrics, especially in relation to complex diseases.

Company has a track record of delivering strong financial performance, its consolidated revenue from operations for the nine months period ended 31 December 2021, nine months period ended 31 December 2020, financial years 2021, 2020 and 2019 was Rs 761.31 crore, Rs 486.17 crore, Rs 650.04 crore, Rs 719.39 crore and Rs 547.29 crore, respectively. Revenue grew at a rate of 56.59% from 9M FY20 to 9M FY21.

Its expansion into obstetrics and gynecology in 2007 to offer comprehensive perinatal services, increased synergies between pediatric and obstetrics and gynecology services. As many pregnancies require deliveries in a comprehensive perinatal ecosystem, to address incidents of high-risk pregnancies, babies requiring immediate surgical interventions and other neonatal interventions right after birth.

Company’s ability to offer integrated pediatric, along with obstetric and gynecologic services, enables it to provide very effective and cost-efficient one-stop healthcare solutions to families.

Company’s hub and spoke model has enabled it to evolve from a single secondary care hospital in Hyderabad, Telangana to six hospitals in the city and as an established provider of tertiary and quaternary care services at its hub hospitals.

Company has adopted the doctor engagement model across its hospitals, which has led to a high degree of full-time doctor retention (at 81% for the period from April 1, 2019 to March 31, 2021). Its ability to attract, train and retain high caliber doctors, is a significant competitive strength for business.

Company has experienced senior management team led by Dr. Ramesh Kancharla, founding Promoter, Chairman and Managing Director. He has over 23 years of experience in the United Kingdom and India in the field of pediatrics, pediatric gastroenterology, liver diseases and liver transplantation.

Weaknesses

Company is dependent on medical professionals and its business could be impacted if unable to attract and retain such medical professionals. The attrition rate for permanent employees, which includes nurses (including interns and paramedical personnel) was 26.74%, 45.50%, 38.75% and 35.41% for the nine months ended December 31, 2021 and the financial years 2021, 2020 and 2019, respectively.

Company’s revenues are highly dependent on its hospitals in Hyderabad and Bengaluru. Company is also significantly dependent on certain specialties for a majority of revenues. Any impact on the revenues from these hospitals or specialties could materially affect business.

Company operates in a regulated industry. Any non compliance with applicable safety, health, environmental, labor and other regulations may adversely affect business.

The healthcare industry and, in particular, the pediatric, obstetrics and gynecologic healthcare markets, are highly competitive in India. If company is unable to compete effectively its market share, business and financial condition could be materially and adversely affected.

If company unable to maintain bed occupancy rates at sufficient levels, it may not be able to generate adequate returns on capital investments, which could materially and adversely affect revenue and profitability. In the financial year 2021, despite an increase in number of available beds, number of hospitals and average revenue per occupied beds, there was a decline in revenue compared to the financial year 2019, owing to a decline in bed occupancy rate. For the financial years 2019, 2020 and 2021, and the nine months ended December 31, 2021, bed occupancy rate was 54.13%, 56.27%, 34.23% and 46.18%, respectively.

Company’s patients pay for inpatient and outpatient services through a mix of cash on-site and credit arrangements, including through third-party payers such as private and public insurers. If payment is not received on time its business may be adversely affected. For financial years 2019, 2020 and 2021 and the nine months ended December 31, 2021, bad debts written off amounted to Rs 16.9 lakh, Rs 17.9 lakh, Rs 31.5 lakh and Rs 11.5 lakh, respectively.

As of December 31, 2021, its borrowings (current and non-current) amounted to Rs 40.68 crore on a consolidated basis. Non-convertible debentures issued by the company contain certain restrictive covenants. These restrictions may limit flexibility in responding to business opportunities, competitive developments and adverse economic conditions.

Company rely on third-party suppliers, manufacturers and services providers for supplies and equipment and other services. Failure of such third parties to meet their obligations could adversely affect its business.

Company’s profitability is dependent on the cost of medical consumables, pharmaceuticals and surgical instruments. If company fails to achieve favorable pricing from suppliers, its profitability could be materially affected. For the financial years 2019, 2020 and 2021, and the nine months ended December 31, 2021 expenses relating to medical consumables and pharmacy items consumed amounted to Rs 80.21 crore, Rs 105.31 crore, Rs 103.26 crore, and Rs 160.96 crore, respectively, representing 16.25%, 16.55%, 17.08%, and 26.72% of total expenses, respectively.

Company’s business is affected by seasonality. Typically, fewer patient visits during the months of March to May, which are the school examination and vacation periods. Therefore its operating results have fluctuated and are expected to continue to vary from period to period.

Valuation

For FY 2021, consolidated sales were down by 9.64% to Rs 650.05 crore compared to FY 2020. OPM decreased by 234 bps to 25.05% which led to 17.36% decrease in operating profit to Rs 162.83 crore. Other income decreased 0.80% to Rs 10.26 crore, while interest cost fell 1.22% to Rs 44.06 crore and depreciation increased 5.66% to Rs 73.34 crore. PBT decreased 40.35% to Rs 55.69 crore. Tax expenses for FY2021 was of Rs 16.13 crore compared to tax expense of Rs 38.02 crore in FY2020. Minority interest for FY2021 was negative Rs 0.45 crore compared to negative Rs 0.39 crore in FY2020, Net profit went down 28.21% to Rs 40.01 crore.

For 9M FY22, consolidated sales were up by 56.59% to Rs 761.31 crore compared to 9M FY21. OPM increased by 687 bps to 33.72% which led to 96.67% increase in operating profit to Rs 256.74 crore. Other income increased 56.99% to Rs 12.75 crore, while interest cost rose 18.16% to Rs 36.93 crore and depreciation increased 14.60% to Rs 60.98 crore. PBT increased 216.59% to Rs 171.59 crore. Tax expenses for FY2021 was of Rs 45.17 crore compared to tax expense of Rs 15.68 crore in FY2020. Minority interest for 9M FY22 was Rs 0.34 crore compared to negative Rs 0.22 crore in 9M FY21, Net profit rose 225.45% to Rs 126.07 crore.

The TTM EPS on post-issue equity works out to Rs 12.50. At the upper price band of Rs 542, P/E works out to 43.20.

As of 25 April 2022, its listed peers such as Apollo Hospitals Enterprise trades at TTM P/E of 76.12, Fortis Healthcare trades at TTM P/E of 46.15, Narayana Hrudalaya trades at TTM P/E of 41.86, Max Healthcare trades at TTM P/E of 71.94 and Krishna Institute of Medical Sciences trades at TTM P/E of 34.87.  For FY21, Rainbow Children’s Medicare OPM and ROE stood at 25.05% and 8.96% respectively, compared to 10.77% and 3.26% for Apollo Hospitals Enterprise, 10.04% and negative 1.79% for Fortis Healthcare, 7.05% and negative 1.27%% for Narayana Hrudalaya , 16.12% and negative 2.43% for Max Healthcare and 27.89% and 20.79% for Krishna Institute of Medical Sciences respectively.