Wednesday, February 12, 2025

Dr. Agarwal’s Health Care IPO: Is a clearer vision on the horizon?

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The company, led by Dr. Amar Agarwal, a renowned ophthalmologist with over 35 years of experience, is well-positioned to capitalize on the expanding healthcare sector. However, its lofty valuations compared to rivals and its declining ability to service its debt could hinder future expansion plans.

The company’s first foray into the stock market was in 1995, when it listed its subsidiary, Dr. Agarwal’s Eye Hospital, on the BSE to fuel expansion in Tamil Nadu. In 2010, the holding company, Dr. Agarwal’s Health Care was established with a 72% stake in Dr. Agarwal’s Eye Hospital Ltd. 

“Our plan is to merge the subsidiary with the holding company within the next three years. We aim to complete this within that timeframe,” Adil Agarwal, the company’s chief executive officer told Mint. “The reason for listing the holding company is that we believe the company, due to its size, scale, and strong financial position, presents significant value and wealth creation opportunities for all our stakeholders,” he added.

With an estimated 25% market share in FY24 and a network of 209 facilities nationwide, Dr. Agarwal’s Health Care offers a range of eye care solutions, including cataract and refractive surgeries, consultations, diagnoses, non-surgical treatments, and the sale of optical products, contact lenses, and pharmaceutical items.

Also read: Four generations of eye doctors from Chennai build $1.5 billion eye care business

Healthy financials

The company has achieved a 38.3% revenue and a 48.4% net profit growth between FY2022 and FY2024. “The impressive three-year compounded annual growth rate demonstrated by Dr Agarwal Health Care positions it favourably for continued robust growth. The company’s revenue growth showcases strong execution capabilities, said Atul Parakh, CEO of online investment and trading firm Bigul. 

Dr. Agarwal’s ‘hub-and-spoke’ model, characterized by scalability and efficiency, has been a key driver of its consistent domestic revenue growth. The model allows patients to access care conveniently. They can visit a nearby primary or secondary facility (spoke) and, if necessary, be seamlessly referred to a higher-level facility (hub) for specialized treatment.

“The company’s centres operate on a “hub-and-spoke” model which supports high patient volumes and yields economies of scale and thus allowing greater accessibility and choice to patients,” said Sunny Agrawal, head of fundamental equity research, SBI Securities Ltd.

The asset-light model is expected to enhance capital efficiency over time, positioning the company for sustainable growth, said Parakh. “However, it faces potential risks, including intense competition from specialized eye care providers and large healthcare chains,” he added.

The company competes with ASG Eye Hospitals, Centre for Sight, and Vasan Eye Care in the organized eye care segment.

 

Also read: Analysts love these four stocks in this struggling sector

Expansion on thin ice?

A declining debt service coverage ratio, which dropped from 2.2 times to 1.7 times in the last two years, raises concerns about the company’s long-term financial sustainability. This could significantly hinder future growth and limit its ability to capitalize on new opportunities. Adding to this is the company’s current valuation, which appears inflated relative to its peers (based on the upper price band and basic earnings per share), potentially creating an unattractive investment proposition for long-term investors.

Furthermore, the company’s return on capital (ROCE), based on a three-year median, lags behind its peers, indicating underwhelming performance in capital efficiency.

“The decline in return on capital employed and debt service coverage ratio in FY2024 can be attributed to a one-time deferred tax entry of approximately 38 crores in FY2023. If we exclude this adjustment, the figures show a significant improvement—net profit moved from around 63 crores to 95 crores, reflecting strong growth in profitability.”

“The slight decline in ROCE and debt service coverage ratio warrants attention but should be viewed in context. These metrics likely reflect the company’s aggressive expansion strategy and investments in new facilities, which typically pressure short-term returns,” Parakh said.

Also Read: Dr. Agarwal’s Health Care IPO: High valuation calls for caution

Concentration risk

Meanwhile, the company faces a double-edged sword: high doctor attrition threatens patient care and service delivery, while concentrated revenue streams leave it vulnerable to competitive shocks in key regions.

The company’s doctor attrition rate remained elevated at an average 18.5% in the past three years.

A significant portion of its revenue is concentrated in Chennai, Bengaluru, Mumbai, and Hyderabad. However, the company plans to expand its domestic footprint. “We will explore more opportunities to expand our network in our core markets, which include all the southern states of India and Maharashtra. Along with this, we will expand in other regions like Gujarat and Punjab. We have also entered a new region, Uttar Pradesh, and at the same time, we will look to enter markets wherever we can establish a presence,” the company’s CEO said.

“A significant majority of its facilities are located in Chennai, Maharashtra and Karnataka. These three states put together 62% of total facilities. Any adverse developments in relation to these facilities could adversely affect business, financial condition, results of operations and cash flows,” added Sunny Agrawal.

Also read: Tepid Q3 outlook spells more pain for India Inc. earnings

Eyeing growth

Despite challenges, Dr. Agarwal’s Health Care is well-positioned to capitalize on the burgeoning Indian eye care market, projected to expand at a robust 12-14% CAGR through 2028. Surgical procedures, representing 80-85% of the market in FY2024E, are driving this rapid growth. This dynamic sector operates within a larger Indian healthcare market valued at 6.3 trillion (FY24 estimated), forecast to grow at 9-11% in the next five years.

The broader Indian single-speciality healthcare market, within which eye care is a significant segment, is estimated to be worth between 1.5 trillion and 1.9 trillion in FY24.

 





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