Ashish Chugh, Investment Advisor
Kovai Medical with its Market Cap lower than its Sales Revenues and with a scalable business model seems to be a low risk bet at the current price. June 1, 2007 Kovai Medical Centre & Hospital Ltd. CMP – Rs. 55 BSE Code – 523323 Background Spread over a campus of around 20 acres, Kovai Medical Center and Hospital Ltd. (KMCH) is a 400 bed multi-disciplinary super-specialty corporate hospital located in Coimbatore. The hospital is equipped with most modern equipments like CT Scanner, Angiography equipment, Operating Microscope, Mammography, Color Doppler etc. The hospital has over 30 Medical Departments and 11 Operation Theatres. The hospital is fully equipped and has developed expertise to conduct Super Specialty procedures like Coronary Bypass surgeries, Coronary Angioplasty, Stent Implantation, Laparoscopic & Vascular Surgeries, Hip & Knee replacements, Kidney transplants, and complex Neuro- surgeries. The hospital is recognized to carry out Renal transplants, Corneal transplants and Heart transplants by Tamil Nadu Government. Satellite Centres The hospital has two satellite medical centers located at Ramnagar in Coimbatore and Perundurai, Distt. Erode. The satellite centre at Coimbatore is a 10 bed hospital with facilities like 24 hours Accident & Emergency Services, 24 hours pharmacy, Laboratory, X-Ray and ECG Services, Obstetrics and Gynecology, Pediatrics, Dermatology, General Consultation, Physiotherapy Centre and Dental Hospital. The other satellite centre located at Perundurai is a 50 bed hospital with facilities like 24 hours Accident & Emergency Services, Laboratory, Radiology and pharmacy services, General Medicine, Chest Clinic, Obstetrics and Gynecology, Paediatrics, Dermatology, General Consultation, and Physiotherapy Centre. Financials The latest financials of the company are given as under : (Rs in Crore) Particulars Quarter Ended Quarter Ended Quarter Ended YTD / Latest Half YTD / Latest Half YTD / Latest Half Year Ended Year Ended Year Ended (Dec 06) (Dec 05) (% Var) (Dec 06) (Dec 05) (% Var) (Mar 06) (12) (Mar 05) (12) (%Var) Sales 18 13.31 35.2 48.5 37.7 28.6 51.18 40.55 26.2 Other Income 0.14 0.14 0 0.36 0.41 -12.2 0.58 0.56 3.6 PBIDT 4.4 2.97 48.1 11.15 8.15 36.8 9.9 5.96 66.1 Interest 0.21 0.23 -8.7 0.79 0.73 8.2 0.96 0.94 2.1 PBDT 4.19 2.74 52.9 10.36 7.42 39.6 8.94 5.02 78.1 Depreciation 0.85 0.78 9 2.57 2.33 10.3 3.07 2.69 14.1 PBT 3.34 1.96 70.4 7.79 5.09 53 5.87 2.33 151.9 Tax 1.11 0.26 326.9 2.53 0.51 396.1 1.16 0.19 510.5 Deferred Tax 0.35 0 - 0.3 0 0 0.83 0.98 -15.3 PAT 1.88 1.7 10.6 4.96 4.58 8.3 3.88 1.16 234.5 Source: Capitaline Latest Data As On 31/05/2007 Rs (In cr) Latest Equity(Subscribed) 10.94 Latest Reserve 5.17 Latest Bookvalue -Unit Curr. 14.73 Latest EPS -Unit Curr. 5.37 Latest Market Price -Unit Curr. 55.05 Latest P/E Ratio 10.25 52 Week High -Unit Curr. 63.75 52 Week High-Date 5/31/2006 52 Week Low -Unit Curr. 33 52 Week Low-Date 6/8/2006 Market Capitalisation 60.22 Stock Exchange BSE Dividend Yield -% 1.82 Source: Capitaline Business Scale up - Expansion Project & through Inorganic Route The company is scaling up its capacity through an expansion project and through acquisitions. The company is currently expanding its capacity by 200 beds at its existing campus at Coimbatore. The speciality block is under construction and is expected to start operations from June 2008. The expansion programme will also improve certain infrastructure facilities like captive power generation, centralized air-conditioning system, pneumatic pipe line system for transporting materials and a state of the art IT Infrastructure for managing the Hospital operations. The company is also making substantial investments to upgrade the diagnostic treatment facilities to cover speciality departments in the Hospital like Cardiology, General Surgery, Orthopaedics, Intensive Care etc. The company has recently entered into a Memorandum of Understanding (MOU) with Idhayam Hospitals Erode Ltd located at Erode to acquire 100% stake in the company. The agreed purchase consideration is Rs 925 Lacs which involves discharge of unsecured loans, one time settlement with the Lenders, Cost of Medical Equipments and payment to the shareholders. Idhayam Hospital has a 50 bedded Hospital at Erode which is exclusively for Cardio-thoracic patients. Conclusion The Healthcare sector in India offers immense opportunities. The country now boasts of a number of corporate hospitals offering Five Star Medical facilities. India is a source market for professionals in the medical field for most of the renowned hospitals around the world. The cost of treatment is a fraction of costs in the other parts of the world with comparable success rates and service levels at par with the best in world. Medical Tourism itself could be a Big Opportunity and as per some estimates India can earn over US $ 1 billion annually from it. Moreover with many Insurance companies offering Health Insurance covers and most corporates taking Health Insurance for their employees, the opportunities for these hospitals are much more than ever before. Kovai Medical owns a 400 bed hospital and two Satellite Centres located in Southern part of the country. The company is aggressively scaling up its capacity- both through organic and inorganic route. For the current FY, the expected revenues of the company are Rs.70-72 crores with a PAT of Rs.7.0 crores. With its existing market cap of Rs.60 crores, the valuations of the company look attractive, when compared with the peer group. The new hospital acquired by the company is capable of adding Rs.8-10 crores to the topline of the company in a year. Therefore assuming a growth of 20% from the existing operations and addition from Idhayam Hospital, the company can target revenues of Rs.90-95 crores in FY 07-08. Moreover, with the expansion at its existing campus in Coimbatore getting completed by June 08, one can look forward to substantially higher revenues in the future. Kovai Medical, with this 400 bed hospital located on 20 acres in a prime location in Coimbatore, with 11 well equipped Operation Theaters, two Satellite Centre, its ongoing expansion and with the latest acquisition, the current market cap of Rs.60 crores is nowhere near the asset creation which is happening, apart from the fact that revenues and profits of the company are all set to grow over the next few years. Most Hospital stocks – be it Apollo Hospital, Indraprastha Medical or Kovai Medical, unlike many other stocks, have not seen wild gyrations in their stock prices on the bourses in the past two year. These stocks have been moving in a narrow band most of the time and seem to be consolidating. We believe the sector could outperform the indices in the times to come. Kovai with its Market Cap lower than its Sales Revenues and with a scalable business model seems to be a low risk bet at the current price.