Rainbow Hospital IPO opens for subscription on 27 April 2022 and is scheduled to close on 29 April 2022. Headquartered in Hyderabad, the company is a multi-specialty pediatric and obstetrics and gynecology hospital chain and operates 14 hospitals and three clinics in six cities. Rainbow Hospital IPO Review is aimed at bringing readers up to the speed with regards to the company’s business, strengths and valuation.
Rainbow Hospital IPO Review – Strengths
- Multi-specialty healthcare chain with strong clinical expertise in managing complex diseases
- Comprehensive perinatal care provider, with synergies between pediatric and obstetrics and gynecology services
- Hub-and-spoke model that provides synergies and ensures better care and access for patients
- Proven ability to attract, train and retain high-caliber medical professionals (full-time doctor retention stood at 81% for the period from 1 April 2019 to 31 March 2021
- Strong track record of growth, operational and financial performance
Rainbow Hospital IPO Analysis – Risk Factors
- Excessive dependence on medical professionals
- Doctors primarily engaged on a consultancy service contract basis and not under employment contracts
- Revenues highly dependent on Hyderabad and Bengaluru hospitals which accounted for 79% of its aggregate inpatient and outpatient volume of all hospitals
- No definitive agreements signed for the new planned hospitals
Rainbow Hospital IPO Analysis – Financial Performance
| Â | FY2019 | FY2020 | FY2021 | 9M FY2022 |
| Revenue | 551.1 | 729.7 | 660.3 | 774.1 |
| Expenses | 493.6 | 636.4 | 604.6 | 602.5 |
| Net income | 44.6 | 55.3 | 39.6 | 126.4 |
| Net margin (%) | 8.1 | 7.6 | 6.0 | 16.3 |
Rainbow Hospital Valuations & Margins
| FY2019 | FY2020 | FY2021 | FY2022 | |
| EPS | 4.74 | 5.92 | 4.25 | 17.49* |
| PE ratio | NA | NA | 121.41 – 127.53 | 29.50 – 30.99 |
| RONW (%) | 12.01 | 13.68 | 8.88 | 21.45 |
| ROCE (%) | 11.68 | 16.32 | 10.48 | 22.06 |
| EBITDA (%) | NA | NA | NA | NA |
| Debt/Equity | 0.14 | 0.14 | 0.11 | 0.07 |
| NAV | NA | NA | 48.82 | 61.63 |
Rainbow Hospital IPO Review – Subscribe or Avoid?
Started in 1999 with a single hospital, Rainbow Children’s Medicare has transformed into a network of 14 hospitals and three clinics in six cities, with a total bed capacity of 1,500 beds as of 31 December 2021. This is the highest count of hospital beds in in the maternity and pediatric healthcare delivery sector. The company had 641 full-time doctors and 1,947 part time/visiting doctors as of 31 December 2021.
Despite being a hospital chain, the company’s business model is vastly different from its regular and generic counterparts. One obvious difference is that the company operates in the niche of maternity and pediatric healthcare. The other important point to note is that the company is a premiumization play on these services. This is reflected in its vastly superior KPIs. For example, its ROCE and ROE stood at 22% and 21% respectively for the nine months ended 31 December 2021.
Similarly, its average revenue per occupied bed (ARPOB) per day during nine months ended 31 December 2021 stood at INR45,951 which is on the higher side compared to non-specialized hospitals. These data points are indicative of the fact that the company’s operations aren’t directly comparable to most of its listed peers such as Apollo Hospitals, Max Healthcare, Fortis Healthcare, Narayana Hrudayalaya and Krishna Institute Of Medical Sciences. In short, Rainbow Hospital is catering to a highly affluent segment which doesn’t mind spending. Notably, this segment is expected to expand in the coming years through word of mouth publicity and network effects.
Performance on operational metrics
Nevertheless, losing sight of operational parameters would be a perfect recipe for disaster. In this department, Rainbow Hospital does a decent job as reflected in its financial performance. Its revenues have been increasing in recent years, except in FY2021 for understandable reasons. Similarly, return ratios have followed an upward trajectory while debt equity ratio has declined.
Given the strong show posted by the company, it is not surprising to see that 30.45% equity is with private equity investor British International Investment Plc (erstwhile CDC Group) and CDC India. Both investors plan to offload half of their stake through the OFS component.
Rainbow Hospital IPO Analysis – Valuations
Its IPO pricing band of INR516 – 542 per share may appear to be on the higher side with PE ratio expanding to three digits on the basis of FY2021 earnings. However, last year’s performance was affected due to Covid-19 pandemic and the performance for the latest nine months of FY2022 is already out. Accordingly, this performance of the latest nine months should have a greater weightage in our analysis.
Extrapolating past performance is often a risky affair but in certain cases like this, it makes sense to get a better view of the current situation and how it is going to unfold in future. Its nine-month EPS of INR13.12 translates to annualized figure of INR17.49 for FY2022 (need to highlight that it is hypothetical) which puts the price band to a PE ratio range of 29.50 – 30.99. This is much better a range and is quite attractive when compared with Narayana Hrudayalaya’s 42.8, Apollo Hospitals’ 76.8, Max Healthcare’s 147, Fortis Healthcare’s 56.8, and recently listed KIMS’ 35.4.
Rainbow Children’s Medicare’s Price/Sales ratio stands at 7.91 for FY2021 and this is on the higher side than most of its competitors. However, this is understandable considering the company’s better return ratios and profitability. In some ways, it can be argued that Rainbow Hospital should not be valued as a traditional hospital as its service offerings are centered around the rich experience it promises to deliver.
In our Rainbow Hospital IPO analysis, we found the company is well-placed to capitalize on expected demand through its strong brand, presence in major Indian cities (and plans to further expand the footprint), growing propensity to spend on quality healthcare among youngsters and robust operational performance.
Rainbow Hospital IPO Review – Broker Calls
Angel One – Neutral
Arihant Capital –
Ashika Research – Subscribe
Asit C Mehta –
BP Wealth –
Canara Bank Securities – Subscribe with caution
Choice Broking – Subscribe with caution
Elite Wealth – Subscribe
GEPL Capital – Subscribe
Hem Securities – Subscribe
ICICIdirect – Subscribe
KR Choksey –
Marwadi Financial Services –
Motilal Oswal –
Nirmal Bang – Subscribe for long term
Religare Broking –
Samco Securities – Subscribe for long term
Share India Securities –
SMC Global –
Systematix – Not rated
Ventura Securities – Not rated
