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Review By Dilip Davda on April 22, 2022

•    RCML is a multi-speciality healthcare service provider for children's Medicare
•    Post covid, it started gaining momentum and is poised for rapid growth
•    Currently it is a South and North centric healthcare service, provider.
•    Based on FY22 annualize earnings, the IPO appears reasonably priced.
•    Investors may consider investment for short to long term rewards.

ABOUT COMPANY:
Rainbow Children's Medicare Ltd. (RCML) is a leading multi-speciality pediatric and obstetrics and gynaecology 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 (which was commissioned and paid for by the Company in relation to the Offer), it 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 specialities are pediatrics, which includes newborn and pediatric intensive care, pediatric multi-speciality services, pediatric quaternary care (including multi-organ transplants); and obstetrics and gynaecology, which includes normal and complex obstetric care, multi-disciplinary fetal care, perinatal genetic and fertility care. 

RCML established the first pediatric speciality hospital in 1999 in Hyderabad, Telangana. Since then, it has established a reputation as a leader in multi-speciality pediatric services, with strong clinical expertise in managing complex diseases. It has also expanded operations to include obstetrics and gynaecology services, whereby the company offers comprehensive perinatal services to patients. As of the date of this Red Herring Prospectus, five of its hospitals are accredited by NABH and three of the hospitals are certified by EDGE. It has grown its bed capacity from 50 beds in a single hospital in 1999 to 1,500 beds across 14 hospitals as of December 31, 2021, and has 3853 employees on its payroll. 

In recent years, it has expanded its hospital network and increased bed capacity from 1162 beds as of March 31, 2019, to 1500 beds as of December 31, 2021. Over the same period, it increased the number of hospitals from 10 to 14. The company has approached network expansion with financial prudence and has been disciplined when making financial decisions for capital investments. All its capital investments are carefully deliberated and approved by the experienced Board. Its ability to keep capital expenditure at economical levels has been an important factor in driving growth in a profitable manner in prior periods. Going forward, RCML may seek to expand its hospital network through the acquisition of brownfield assets or the development of greenfield assets (depending upon the location of the hospital and the timelines to complete the project).

It follows a hub-and-spoke model in Hyderabad, Telangana with Banjara Hills hospital (comprising 250 beds) being the hub and four spokes at four locations in Hyderabad, Telangana 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 gynaecology and emergency services. This model has strengthened RCML's market position in and around Hyderabad, Telangana providing it with synergies through referrals for tertiary and quaternary care to hubs arising from the spoke hospitals.

it also plans to increase the scale of reach to patients through a robust digital ecosystem. In the period from April 1, 2020, to March 31, 2021, driven in part by the movement restrictions arising out of the COVID-19 pandemic, it conducted over 125,000 outpatient video consultations through a video consultation platform.

ISSUE DETAILS:
To part finance its needs for early redemption of NCDs issued to CDCEML (Rs. 40.00 cr.), Capex for setting up of new hospital (Rs. 170 cr.) and for general corporate purposes, RCML is coming out with a maiden IPO having a combo of fresh equity issue worth Rs. 280 cr. (approx. 5166045 shares) and an offer for sale of 24000900 equity shares of Rs.10 each. The company has announced a price band of Rs. 516.00 to Rs. 542.00 and at the upper price band the overall size of the IPO will be around Rs. 1580.85 cr. (approx. 29166945 shares) The issue opens for subscription on April 27, 2022, and will close on April 29, 2022. The minimum application to be made is for 27 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 28.74% of the post issue paid-up equity capital of the company.

The company has reserved 300000 shares for its eligible employees and offering them a discount of Rs. 20 per share. From the residual portion, it has allocated 50% for QIBs, 15% for HNIs and 35% for Retail investors. 

The joint Book Running Lead Managers to this issue are Kotak Mahindra Capital Co. Ltd., J.P. Morgan India Pvt. Ltd. and IIFL Securities Ltd. while KFin Technologies Ltd. is the registrar to the issue. 

Having issued initial equity at par, RCML has issued/converted further equity in the price range of Rs. 20.00 to Rs. 436.01 between March 2011 and April 2022. It has also issued bonus shares in the ratio of 1 for 1 in June 2008, 3 for 1 in January 2018 and 1 for 1 in December 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 0.91 Rs. 7.32, Rs. 54.50 and Rs. 110.29 per share. 

Post-IPO, RCML's current paid-up equity capital of Rs. 96.33 cr. will stand enhanced to Rs. 101.50 cr. Based on the upper cap of the price band, the company is looking for a market cap of Rs. 5501.30 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, RCML has (on a consolidated basis) posted turnover/net profits of Rs. 551.14 cr. / Rs. 44.59 cr. (FY19), Rs. 729.74 cr. / Rs. 55.34 cr. (FY20) and Rs. 660.31 cr. / Rs. 39.57 cr. (FY21). For the first nine months ended on December 31, 2021, of FY22 it has earned a net profit of Rs. 126.41 cr. on a turnover of Rs. 774.06 cr. 

For the last three fiscals, RCML has posted an average EPS of Rs.4.89 and an average RoNW of 11.00%. The issue is priced at a P/BV of 8.79 based on its NAV of Rs. 61.63 as of December 31, 2021, and at a P/BV of 6.30 based on its post-IPO NAV of Rs. 86.07 (at the upper price band). 

If we annualize FY22 earnings and attribute it to the fully diluted post IPO equity, then the asking price is at a P/E of 43.53. 

COMPARISON WITH LISTED PEERS:
As per the offer document, RCML has shown Apollo Hospitals, Fortis Healthcare, Narayana Hrudayalaya, Max Healthcare and Krishna Institute as its listed peers. They are currently quoting at a P/E of 108.88, 00, 172.53, 146.19 and 40.96 (As of April 22, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
The company paid a dividend of 10% for FY19, 30% for FY20 and then skipped it and for FY22 it announced a dividend of 20%. Thus it's a dividend-paying company. It will continue its prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKERS' TRACK RECORDS:
The 3 BRLMs associated with this issue have the following track records:
1.    This is the 26th mandate from Kotak Mahindra Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, 4 opened at discount and the rest with premiums ranging from 0.04% to 79.38% on the day of listings.
2.    This is the 6th mandate from J.P. Morgan in the last three fiscals (including the ongoing one). Out of the last 5 listings, 4 opened at discount and the rest with a premium of 3.92% on the day of listings.
3.    This is the 31st mandate from IIFL Securities in the last four fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at discount, 1 at par and the rest with premiums ranging from 0.04% to 46.33% on the day of listings. 

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