Krishna Institute of Medical Sciences coming with an IPO to raise upto Rs 2,144 crore

Krishna Institute of Medical Sciences

• Krishna Institute of Medical Sciences is coming out with a 100% book building; initial public offering (IPO) with face value of Rs 10 each in a price band Rs 815-825 per equity share.
• Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on June 16, 2021 and will close on June 18, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 81.50 times of its face value on the lower side and 82.50 times on the higher side.
• Book running lead manager to the issue are Kotak Mahindra Capital Company, Axis Capital, Credit Suisse Securities (India) and IIFL Securities.
• Compliance Officer for the issue is Umashankar Mantha.

Profile of the company

The company is one of the largest corporate healthcare groups in AP and Telangana in terms of number of patients treated and treatments offered. It also provides multi-disciplinary integrated healthcare services, with a focus on primary secondary & tertiary care in Tier 2-3 cities and primary, secondary, tertiary and quaternary healthcare in Tier 1 cities. It operates 9 multi-specialty hospitals under the “KIMS Hospitals” brand, with an aggregate bed capacity of 3,064, including over 2,500 operational beds as of March 31, 2021, which is 2.2 times more beds than the second largest provider in AP and Telangana. It also offers a comprehensive range of healthcare services across over 25 specialties and super specialties, including cardiac sciences, oncology, neurosciences, gastric sciences, orthopaedics, organ transplantation, renal sciences and mother & child care.

The company strives to provide quality service to more patients, and it has scope for additional patients and improved occupancy rates. It strategically focuses on the southern India healthcare market where it has a strong understanding of regional nuances, customer culture and the mindset of medical professionals and where there is significant and growing need for quality and affordable healthcare services. Each of its hospitals also has integrated diagnostic services and pharmacies that cater to its patients. Affordability and quality of healthcare services provided by it and its track record of building long-term relationships with medical professionals including its doctors, has enabled growth and helped it build its ‘KIMS Hospitals’ brand. It operates and manages all of its hospitals, which provides it with greater control over its facilities and helps it to better deliver high quality and affordable healthcare services.

Proceed is being used for:

• Repayment/pre-payment, in full or part, of certain borrowings availed by company and by Subsidiaries viz KHKPL, SIMSPL and KHEPL.
• General corporate purposes.

Industry overview

The healthcare industry, like other industries, is constantly evolving in terms of technology. Developments in information technology have helped create systems that ensure faster and reliable services. While, on the one hand, these systems help increase reach and quality of healthcare delivery systems across the country, on the other, they enable healthcare delivery providers to improve efficiency by helping them in resource planning, maintaining patient records. Healthcare delivery may also be classified as primary, secondary and tertiary, on the basis of the complexity of ailment being treated. For instance, a hospital treating heart diseases may be classified as a primary facility if it addresses conditions such as high cholesterol; as a secondary facility if it treats patients suffering strokes; or as a tertiary facility if its deals with cardiac arrest or heart transplants.

The Indian healthcare delivery system has seen consolidation in recent years. A highly competitive industry, coupled with tightening of healthcare regulations, has made it difficult for smaller players in the industry to stay profitable. Larger hospital brands typically have stronger financial discipline and negotiating power with suppliers, better ability to attract medical talent, and greater capital and administrative resources to meet these needs over standalone hospitals. Many of the established players in the healthcare delivery industry follow inorganic growth to expand into the geographies where they have limited presence. In terms of supply creation, major hospital chains have expanded into the next level of creamy tier 2 and 3 locations (with 67% aggregate bed additions by 10 large hospitals players in the past four years being in these areas). The government has raised its healthcare budget by 10% for fiscal 2021 to Rs 69,000 crore, keeping in line with its goal to raise its healthcare spending to 2.5% of GDP by 2025 under the National Health Policy, 2017.

Pros and strengths

Regional leadership driven clinical excellence and affordable healthcare: The company is one of the largest corporate healthcare groups in AP and Telangana in terms of number of patients treated and treatments offered. The company strategically focus on the southern India healthcare market where it has a strong understanding of regional nuances, customer culture and the mind-set of medical professionals and where there is significant and growing need for quality and affordable healthcare services. It delivers clinical excellence through quality healthcare services, supported by a combination of top medical talent, strong clinical and patient safety protocols and investments in new medical technology. It provides treatment for complex and chronic diseases covering primary, secondary, tertiary and quaternary healthcare. In addition to providing core medical, surgical and emergency services, it provides complex and advanced quaternary healthcare in various specialties. To sustain company’s affordable pricing while still generating strong returns, it rationalizes its doctor, procurement and other administrative costs. It manages its doctor costs by using a mix of fixed and variable compensation arrangements, based on patient volumes, costs and other factors at each of its hospitals.

Ability to attract, train and retain high quality doctors, consultants and medical support staff: The company maintains its standard of high quality healthcare by consistently employing a diverse pool of talented doctors, nurses and paramedical professionals. Its multi-disciplinary approach, combined with its affordable cost for treatment, a high-volume tertiary care model, and its focus on teaching and research, has helped it attract and retain high quality doctors and other healthcare professionals. Many of its specialists, physicians and surgeons have been trained in premier medical institutions across the world and have received accolades and awards. The company has taken significant efforts to create a culture that nurtures its medical talents and encouraged its doctors to become stakeholders in the KIMS hospitals where they work. This culture of empowerment and ownership has encouraged learning and training in its hospitals, and led to good talent retention and allowed patients to create long-term relationships with its doctors.

Disciplined approach in acquisitions resulting in successful inorganic growth: The company has a successful history of sourcing, executing and integrating acquisitions. It has a disciplined, low-leverage approach to acquisitions that has enabled it to maintain its affordable pricing model as it have grown in both Tier 1 and Tier 2-3 markets. Since Fiscal Year 2017, the company has expanded its hospital network primarily through acquisitions of other hospitals. In Fiscal Year 2017, it acquired its hospital in Ongole (AP), a 350-bed multispecialty hospital founded by local doctors, through a slump sale by Ongole Arogya Hospitals. It expanded its hospital network to add KIMS Vizag, a 434-bed multispecialty hospital in April 2018 by entering into a service agreement. In addition, it acquired a 250-bed hospital in Anantapur (AP) in October 2018 and a 200-bed hospital in Kurnool (AP) in April 2019, which solidified its presence in southern AP and adjoining areas of Karnataka. 

Track record of strong operational and financial performance: The company has grown from a single, approximately 200-bed hospital at Nellore (AP) in 2000 to a leading multi-disciplinary integrated private healthcare service provider with nine multi-specialty hospitals and over 3,000 beds today. It has consistently delivered strong operational and financial performance through strong patient volumes, cost efficiency and diversified revenue streams across medical specialties. It has achieved healthy profitability in both Tier 1 and Tier 2-3 markets by identifying markets with significant underserved healthcare demand and delivering quality healthcare services at affordable prices, which in turn drives patient volumes.

Risks and concerns

Highly dependent on healthcare professionals: The company’s operations depend on the efforts, ability and experience of its healthcare professionals, including its doctors, nurses, consultants and other medical staff at its hospitals. A majority of its doctors are not its employees. As of March 31, 2021, it had 1,137 doctors, of whom 647 were engaged on a consultancy basis and 230 were doctors under the DNB and post-doctoral fellowship student program. Some of its doctors do not work exclusively with it and are permitted to engage in private practice outside of its business and to work at hospitals that compete with it. The attrition rate for its healthcare professionals, which includes resident doctors (including DNB students), consultant doctors, nursing staff (including interns) and paramedical personnel, for Fiscal Years 2019, 2020 and 2021 was 39.7%, 39.0% and 51.6%, respectively. The higher attrition rate in Fiscal Year 2021 was primarily due to higher attrition in nursing staff. The company’s performance and the execution of its business strategies depend substantially on its ability to attract, recruit and retain leading healthcare professionals in a particular specialty or in a region relevant to its growth plans. It competes with other healthcare services providers in recruiting and retaining trained healthcare professionals, which are in shortage in the market.

Revenues highly depends on hospitals in Hyderabad: The company’s hospital at Secunderabad (Telangana) also has contributed more to its revenue from operations due to high-end specialised procedures and services being provided, given its location and the profile of patients that it caters to. In Fiscal Years 2020 and 2021, its seven main specialty departments (cardiac sciences, oncology, neurosciences, gastric sciences, orthopaedics, renal sciences and mother & child care) accounted for 80.80% and 76.51% of its inpatient volumes, respectively. Any material impact on its revenues from its hospitals at Secunderabad and Kondapur in Telangana or from such specialties, including by reason of reduction in patient footfall, reputational harm, liabilities on account of medical negligence or natural calamities and increased competition, could have a material adverse effect on its business, financial condition, results of operations and cash flows.

Face intense competition: The company operates in a competitive environment. In most markets, it competes with hospitals, clinics, diagnostic chains and dispensaries of varying sizes with different specialties. It competes on the basis of factors such as its specialty and other service offerings, quality and selection of healthcare professionals, affordability, quality of care, technology, quality of facilities, patient satisfaction, brand and reputation. Its pharmacies in its hospitals compete on factors such as price and product offerings. Some of its multi-specialty competitors offer services that it does not offer. Some of its competitors are owned or operated by governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions, which can finance capital expenditures without incurring significant tax obligations. It may also face competition from new market entrants, such as established foreign healthcare companies which may enter the Indian market in the future.

Operate in highly regulated industry: The company operates in a highly regulated industry and are subject to extensive regulations. These government regulations can significantly impact its results of operations and continued growth. Regulations related to price control on specified services and procedures may also dictate the operational mix and volume of services that it provides, which could also impact its results of operations. Profit margins at its onsite pharmacies are also affected by government policies which regulate pricing of items sold at its pharmacies or utilised in medical procedures in its hospitals. The GST implementation has had an adverse impact on healthcare service costs and operating margins since hospitals were unable to utilize input GST credit on output services as hospitals have been classified under the exempt category. The possibility of further regulatory interventions by Government in future is an existing challenge for healthcare service providers in India. Any failure or non-compliance to adequately monitor compliance may subject it to penalties, fines, or suspension of any of its hospitals’ license.

Outlook

Incorporated in 1973, Krishna Institute of Medical Sciences (KIMS) is one of the largest healthcare groups in AP and Telangana. KIMS provides multi-disciplinary healthcare services with a key focus on primary, secondary, & tertiary care in tier 2-3 cities. The company offers a comprehensive range of healthcare services including oncology, cardiac sciences, neurosciences, gastric sciences, orthopaedics, renal sciences, organ transplantation, and mother & child care. The company strategically focus on the southern India healthcare market where it has 22a strong understanding of regional nuances, customer culture and the mindset of medical professionals and where there is significant and growing need for quality and affordable healthcare services. Each of its hospitals also has integrated diagnostic services and pharmacies that cater to its patients. It operates and manage all of its hospitals, which provides it with greater control over its facilities and helps it to better deliver high quality and affordable healthcare services. On the concern side, the company source its equipment and supplies from third party suppliers under various arrangements. Any failure to procure equipment, reagents or drugs on a timely basis, or at all, from such third parties and on commercially suitable terms could affect its ability to provide its services. It operates in a capital-intensive industry and may need additional funding to finance its operations and growth strategies. Sources of additional financing may include commercial bank borrowings, supplier financing, or the sale of equity or debt securities. There can be no assurance that it will be able to obtain any additional financing on terms acceptable to it, or at all.

The issue has been offered in a price band of Rs 815-825 per equity share. On the performance front, the company’s revenue from operations increased by Rs 2,072.92 million, or 18.46%, from Rs 11,226.45 million in Fiscal year 2020 to Rs 13,299.37 million in fiscal year 2021. Its profit for the year increased by Rs 904.07 million, or 78.57%, from Rs 1,150.72 million in fiscal year 2020 to Rs 2,054.79 million in fiscal year 2021. The company intends to strengthen its existing hospitals by further balancing its specialty mix and deepening its expertise in select specialties. It plans to continue to focus on, and expand its ability to provide, complex and advanced quaternary healthcare in various specialties, and to launch mother & child care services in more of its hospitals. It also plans to focus on developing complicated specialist-skill driven clinical areas of organ transplant, mother & child care and oncology, to enhance its brand name particularly at hospitals where it observes strong growth inpatient volumes.