Dr. Agarwal's Health Care IPO: High valuation calls for caution

Dr. Agarwal's Health Care Ltd's initial public offering (IPO) represents a milestone for India’s specialized healthcare sector. With a strong operational model, robust financials, and a clear growth strategy, the company is eyeing the pole position in the expanding eye care market.

The public issue, which combines a fresh issue of ₹300 crore and an offer-for-sale (OFS) of ₹2,727 crore, aims to raise a total of ₹3,027 crore. With a valuation pegged at ₹12,810 crore at the upper price band of ₹402 per share, the company is digging in for a new phase of growth and consolidation in the burgeoning segment.

However, the high valuation and the significant OFS component necessitate a cautious approach for potential investors.

The expansion drive

Founded in 2010 and headquartered in Chennai, India’s largest eye care chain by revenue and network size has laid out an ambitious roadmap for expansion.

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With 209 facilities, including 193 centres in India and 16 across Africa, the company has built an extensive reach using its innovative hub-and-spoke model.

In 2023-24 alone, the company added 45 new centres, and it plans to continue this trajectory with a mix of greenfield and brownfield projects. A significant focus is on penetrating underserved regions in northern and eastern India, along with expanding its footprint in Africa.

The company is also planning to merge with its listed subsidiary, Dr Agarwal's Eye Hospital Ltd, within the next 12 months. This merger aims to streamline operations, eliminate redundancies, and enhance shareholder value.

By consolidating its operations under a single umbrella, the company seeks to achieve greater operational efficiency and create a more cohesive brand identity.

The company, which served over 2.13 million patients and performed more than 220,000 surgeries in 2023-24, has earmarked the IPO proceeds for specific strategic goals.

From the fresh issue, ₹195 crore will be used to significantly reduce the company’s gross debt of ₹373 crore. This will bolster the company’s financial health and provide additional flexibility for growth.

“Our goal is to become a debt-free company, and this IPO is a crucial step in that direction,” said chief executive Adil Agarwal in a recent interview with CNBC-TV18.

“With cash reserves of ₹126 crore and investments of ₹300 crore, the company’s net debt position is positive. A portion of the proceeds from the IPO will be used to pay down ₹195 crore of our debt, cutting our liabilities by more than half,” he added.

It has allocated remaining funds for inorganic expansion and other corporate purposes. However, the high proportion of the OFS component—amounting to 90% of the total IPO size—raises questions about the immediate utility of the funds for the company’s operational growth.

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Private equity giants Temasek and TPG, alongside other promoters, are the primary contributors to the OFS. Post-listing, promoters will hold a 32.5% stake in the company, ensuring their continued involvement in steering the company.

The eye care market

India’s eye care market, valued at ₹37,800 crore in 2023-24, is expected to grow at a compound annual growth rate (CAGR) of 12-14% through 2027-28. Despite this growth, the organized sector constitutes only 13-15% of the market, leaving a significant opportunity for consolidation. Dr. Agarwal’s commands a 25% share of the organized market and generates a revenue 1.7 times that of its nearest competitor, ASG Hospital Pvt. Ltd.

Key growth drivers in the eye care market include an ageing population requiring cataract surgeries, increased prevalence of lifestyle-induced refractive errors, and rising interest in cosmetic eye procedures.

However, challenges such as a shortage of skilled professionals and the fragmented nature of the market pose significant hurdles. Dr. Agarwal’s strategic initiatives aim to address these issues, strengthening its position in this rapidly evolving industry.

The financial performance

Dr. Agarwal's has demonstrated impressive financial performance over the past three fiscal years. The company's revenue from operations grew 30.86% to ₹1,332.15 crore in 2023-24 from ₹1,017.9.80 crore in 2022-23, up 46.25% from ₹6,96.08 crore in 2021-22. For the six months ended 30 September 2024, the company’s revenue reached ₹8,20.06 crore, marking a 26.05% increase from ₹6,50.57 crore in the year-ago period.

According to a Crisil Ltd report, Dr. Agarwal's was the only speciality eye care service provider to experience an increase in its operating profit margin from 2022-23 to 2023-24.

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The company’s financial profile is also marked by a low indebtedness level, reflecting its capital-efficient expansion strategy. As of 30 September 2024, the company’s debt-to-equity ratio stood at 0.66, significantly improving from 0.70 as of 31 March 2024, 1.30 as of 31 March 2023, and 2.71 as of 31 March 2022.

These figures highlight the company’s prudent financial management, enabling it to support growth without overleveraging. Return on capital employed (ROCE) for 2023-24 was reported at 14.61%, slightly lower than 15.18% in 2022-23 and 15.02% in 2021-22. However, these metrics underscore the company’s continued ability to generate efficient investment returns.

The competitive landscape

Dr. Agarwal’s operates in a highly competitive environment, with notable players such as ASG Eye Hospitals, Centre for Sight, and Vasan Eye Care vying for market share in the organized eye care segment. These competitors have extensive networks and offer a comprehensive range of ophthalmic services.

Besides, multi-speciality hospital chains like Apollo Hospitals and Max Healthcare Institute provide indirect competition by including ophthalmology within their service offerings.

Despite the competition, Dr. Agarwal’s has emerged as a market leader in the organized eye care segment, holding a 25% market share as of 2023-24, according to the Crisil report. Its operational efficiency and scale further reinforce the company's dominance, generating revenue 1.7 times that of its closest competitor, ASG Eye Hospitals.

The valuation

According to the red herring prospectus (RHP), the company’s listed peers include Apollo Hospitals Enterprise Ltd with a price-to-earnings ratio (P/E) of 107.11, Max Healthcare Institute Ltd at 95.88, Fortis Healthcare Ltd at 82.11, Global Health Ltd at 57.49, Narayana Hrudayalaya Ltd at 33.14, Krishna Institute of Medical Sciences Ltd at 79.79, Aster DM Healthcare Ltd at 136.07, and Rainbow Children’s Medicare Ltd at 67.90.

Dr. Agarwal’s valuation at a P/E of 134x FY24 earnings per share (EPS) is notably higher, reflecting the premium associated with its leadership and specialization in the eye care market.

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Brokerage firm Anand Rathi’s has given the IPO a “Subscribe-Long Term” rating while highlighting that the premium is justified by the company’s market leadership, robust expansion strategy, and operational efficiencies. However, the brokerage also advises caution, noting that investors must weigh the high valuation against the industry's growth potential and competitive pressures.

The valuation may appeal to long-term investors, given the company’s trajectory, but careful consideration is warranted given the broader competitive landscape.

As the company ventures into the public market, its performance will be closely watched as a bellwether for the specialized healthcare industry. For investors, this IPO offers a chance to be part of a growth story that is reshaping eye care in India and beyond, but it also demands a thoughtful assessment of the associated risks.

The IPO is set to open for subscription on 29 January 2025.

Note: The objective of this article is to share insightful charts, data points, and thought-provoking opinions. It is NOT a recommendation to buy or sell any stocks. If you are considering an investment, please consult a professional financial advisor. This article is intended solely for educational purposes.

Suchitra Mandal is a financial writer with expertise in delivering well-researched insights and detailed analyses of companies' performance and market trends.

Views are personal and do not represent the stand of this publication.