BSE: 523323 | NSE: KOVAI
CMP: Rs.165 | Market Cap: 175 Cr | PE ratio: 9.50 | BV: 71
Screener link | Company Website
Kovai Medical Centre and Hospital (KMCH) is a 691 bed multi-disciplinary super speciality hospital located in Coimbatore. The company has two satellite centres at Ramnagar, Coimbatore (10 beds) and Erode (65 beds). In addition the company through its subsidiary “Idhayam Hospital” operates another speciality hospital (58 beds) in Erode. Coimbatore has emerged as one of the major medical centre in South and is attracting a lot of medical tourism.
KMCH had undertaken a major capex of Rs 269 Cr for increasing the number of beds from 320 in 2008 to 691 beds, completed in phases till Aug, 2012. The company has been reporting very good results in recent quarters. Healthcare industry is an evergreen industry and due to health insurance and medical tourism, the sector should see consistent growth.
Interesting Points:
- In a period of just 2 decades, the promoters have built one of the biggest and renowned hospital of Coimbatore, specializing in over 50 medical disciplines
- The company has had a very good consistent growth – the company has grown from just 34 Cr turnover in 2003 to 300 Cr expected this year
- The last phase of the project involving addition of 210 beds in the dedicated cancer block was made available from March, 12. Since then, the company has been delivering good growth along with significant improvement in margins
- The company has some excellent figures on capacity utilization and patient handling. The hospital has had bed utilization of 90% and has treated more than 2.61 Lac patients during FY 2012.
- The hospital also has a pharmacy division which is also quite profitable. In 2012, the division did a turnover of 45 Cr and contributed 10 Cr towards profits.
- The company has excellent cash flows.
- Promoters regularly buy from open market to increase stake.
Trigger:
To undertake the above expansion, the company had to take a significant debt of 225 Cr. The debt equity ratio shot upto 3.40 as on March, 2012. With the successful completion of expansion and no significant expansion announced as of now, there is a chance that the cash flows might be utilized to bring down debt to comfortable levels. If done, there could be a significant saving in the interest costs (currently 35% of operating profits) and hence a quicker improvement in bottom-line.
Risks:
Hospital is a highly capital intensive and competitive business. If the company again plans a major expansion without bringing down the current debt, then the bottomline may not grow for few years and with high debt, it will be a risky company.
Other Updates:
Call Auction Trading from tomorrow:
The call auction trading is beginning from tomorrow in the illiquid stocks. The procedures and the examples are well documented here (page 8-10).
We discussed the company about 3-4 months back. The stock has been one of the best performer in these challenging markets and has doubled from our discussion levels.
New Ideas and the outlook:
Given the sharp correction in the mid/small cap space, we feel these are the best times for stock picking. Many good companies are available at multi-year lows, at single digit PE multiples, low P/BV ratio and with high dividend yields, just because of the short term negatives and uncertainties. Investors with a longer term horizon of at least 2-3 years should be able to get a very good compounding. At the same time, given the uncertainty and actual slowdown, and the problems in economy, we have to be choosy and study several ideas.
Another good thing of such sharp corrections is that – one can wash away one’s sins. Many good stocks are also beaten down like most of the poor stocks. Like it is important to get rid of the dead woods, it is equally important to get rid of bad stocks too. Invest only in the companies in which you have some conviction or intuition. Stick with the good options and gradually sell the illogical or bad options. This is a painful job that must be done from time to time to get handsome returns.
Among new ideas we are working on Canfin Homes, Wim Plast and K G Denim. We would love to have an opinion of our readers.
Happy Investing!!!
Sir,
How do see the performance of cravatex? I have a small holding @ 318 and I have noticed the share price fall from its high of 700.
Hi Pratul,
Cravatex is an interesting co as the brand FILA has a big potential in India. However, the mgmt has been pretty slow in scaling up and has performed poorer than the expectations.
so it is wise to watch out few quarters that how the company utilise the cash flow to shed debt and then accumulate it as they say when in doubt come in later.. who knows the company as rapidly progressing its foothold mi8 take ana agreesive strategy and hence impact on equity return for a long period unless the debt burden is reduced..
and if u pls can look up in amrit corp, which is having a pe of 1.45 and growth rate of 5 and strong promoter holdings make it very attractive. ur few words on that too pls.?
Hi,
We feel now is the good time to have some exposure and increase the same as things start falling in place.
Had a quick look at Amrit Corp, though it looks statistically cheap but it seems to be just a holding co with no major growth prospects. Please share your reasons for bullishness on the same.
Hi Ayush,
WOuld request you to also have a look at Repco Home Finance
Repco’s mortgage business has been growing at a CAGR of 25% over the past decade and is expected to grow at 20- 22% CAGR over the next decade.
ROE for FY12 is 20%
The above average growth of 40%+ in the past four and a half years makes a compelling case for investment. Considering the two fund infusions in 2007 and 2009 the EPS of the company has grown at around 32%.
Defintely merits a closer look of ur expert eye
Hi Ashwini,
Thanks for the idea. As we don’t track the financial sector very closely, we may not be able to work on it quickly. Will keep it on mind for sure.
Do forward more details, if there at your end.
Ayush,
Can you analyse Bharat Immunologicals and Biologicals Corporation..seems to be a turnaround story
Thanks
Amit Kumra
We haven’t tracked this co but did notice the excellent Q3 result. However, we are not sure if the same are repeatable. Please forwards details at your end.
Ayush,
Please have a look at Camson,Compauage info and Paushak Ltd……debt free and gud growth ..ur advice on these plz
ankur
Sorry, we don’t track the above names. Would advice caution on Camson.
Hi I am pretty impressed by your blog. I was searching for Andhra Sugars on your blog and could not find it. Thought I will suggest you to look at this stock and its fundamentals for your research. Thanks for your post!
Hi Bharat,
We have researched on the stock earlier. It does has lot of value but as the company is in commodity sector, it has its own problems and is more of a defensive stock idea in nature.
We feel that while investing in smaller cap space, we should target cos with good growth prospects along with undervaluation
Hi Ayush,
Nice write up. But the guilt factor of investing in a company making profits on peoples medical misery! Doesnt seem right.
Anyway, I wish to know more about your interaction with Mazda Ltd management. Can u share with us details of the answers to your queries by the management.
Thanks.
Mokhtar
Hospitals are must for a better and healthy living. The higher premium in medical activities is charged to support and encourage research for healthier and better living. One should infact feel good about being able to be associated with a company that is saving the lives of thousands of people.
Malpractices in pharma should be strongly opposed, but it is improper to generalize whole medical industry as a “guilt” industry.
We haven’t interacted with Mazda management.
Yes agree it is not correct to generalize. The pharma companies bringing innovative medicines to us is in need of R&D and thus they charge us a premium. Helping lives with better medications.
However in case of hospitals what R&D do they do? They simply use the medicines supplied by pharma companies. They use sophisticated equipment for surgery etc (mostly imported). Filling and increasing hospital beds for profit is a business.
Thus i mentioned guilt.
Anyway its not in our scope too to defend/allege the industry.
Hi Ayush,
Can you look into the fundamentals of DCW? I was reading abt it in capital market magazine.
Hi Rajdeep,
DCW, does look very interesting on the valuation front. We are trying to study more into it. Please forward details at your end.
Ayush,
I am copy-pasting directly from the magazine :
“In December 2010, the company signed a technical license agreement
with Arkema, France, Europe’s leading producer of vinyl products, to set up a 10,000-tonne CPVC resin and a 12,000-tonne CPVC compound plant at the Sahupuram Complex in Tamil Nadu. DCW will be the first domestic producer of CPVC resin and compound. CPVC is a specialized polymer used for hot and cold water plumbing and industrial applications. UHDE India been appointed the process engineering consultant to prepare detailed engineering.
Once started, this project will take around 15 months to go commercial.
Further, DCW has an agreement with Rockwood Italia SpA Socio Unico, Divisione Silo,Italy, to manufacture yellow and red iron oxide pigment. The capacity of this pigment plant will be 32,000 tonnes. Waste stream coming out from this plant will be used to manufacture 50,000 tonnes of calcium chloride and pure water. An offtake agreement has been signed with Rockwood for 50% of synthetic iron oxide pigments.”
Thanks for sharing the details. These are the projects for long term and would take time to materialize The important thing to understand would be the reasons for strong growth in profitability in recent qtrs and if the same is sustainable.
hi ayush,
could u pls. look upon onmobile???
it seems to have very much oversold and also the co. is back on track after mismgmt. in co.
Sorry, we don’t track the same
Hi Ayush
Just wanted to add some observations from what i know of coimbatore city. There are numerous hospitals in the city that KMCH has to compete against with (PSG,Ganga, Lakshmi group to name a few). I do not know how KMCH differentiates itself from these but from my relatives who are based in the city as per their inputs, this hospital is known to charge premium from its patients and medical tourism only attracts the business elite community in the south. Secondly the percentage of inhouse doctors to visiting consultants of the hospital seems fairly on a lower side.
The population density of coimbatore city is low as compared to other Tier-2 cities like ahmedabad, pune etc (although it may present opportunity) but lack of diversified industrial growth (apart from auto and textiles which the city is known for), the city may not attract new people into the city.
These are purely my observations, appreciate your comments as well. Thanks
Hi Sreekanth,
Thanks for the ground feedback. Such feedbacks are more important to validate the story.
Yes, Coimbatore has become a sort of medical hub and it has lots of hospitals in the area. This is a good thing and if we look into Kovai, they are doing lots of efforts to modernize themselves, get the new certifications, get patients from abroad etc. I think rather than population of Coimbatore, the critical factor would be better services and getting more patients from nearby areas and abroad.
Ayush
Hi Ayush:
Thanks for sharing your thoughts on Kovai.
Would love to hear your thoughts on the following:
1) OPM during the last 3 qtrs (27%, 25% and 23%) has been at the highest level since at least Mar-05 qtr. Avg during the last 20 qtrs has been 20%. Are you aware of any reason for this spike and do you think OPM @ 25+% is sustainable?
2) Any idea how much sales can they achieve with the current capacity?
Thanks,
Arpit
Hi Arpit,
Thanks for writing in. Yes, increase in margin in recent results is the most noticeable thing. I think the margins are higher due to two reasons:
1. The co’s latest addition/expansion has been in the area of Cancer and the co has invested in high tech latest machines. As the treatment of Cancer is very expensive hence the margins must be higher.
2. The latest addition being a brownfield expansion, must have aided in better utilization of resources and hence better margins.
However still to be on the conservative side, we should discount the long term operating margins a bit lower.
We feel they can do 350-400 Cr turnover from current capacity. Though this should be checked up.
Would love to hear your thoughts on the co and the idea
Ayush
Hi Ayush:
Looking at other hospitals’ OPM ranging between 15-20%, it would be quite surprising if they can sustain 25+% OPM over the next few years…
However, on growing revenues, if they can sustain such margins even for a couple of quarters, the stock could see a positive re-rating. But as yet, I am more worried about negative surprise on the margin front.
Of course, if growth kicks in at Rs 100 crs revenue per quarter, such negative impact might still be compromised resulting in decent returns.
Thanks,
Arpit
Hi Arpit,
It was quite interesting to see that Kovai has usually had OPM at about 20% in past while other good and big hospitals don’t have OPM at more than 15-16%. They also have lower ROEs etc.
Ayush
Dear Ayush, Having been one of the originators of the stock idea in Kovai Medicals, which I am holding for past 8 years bought at Rs. 10, I quite agree that de leveraging will be a big trigger. The promoter led management team has very strong expertise being well renowned doctors, with a OP to IP conversion of 25%, which is very impressive. If the management can now increase their vision to areas like Medical Tourism from Middle East, Cardiac Speciality JVs in Middle East, etc, it can then scale up rapidly. It would be important to engage in discussions with the management. Could be a potential multi bagger.
Hi Raghotham,
Yes, if one looks at the past growth history, the co has done superbly. It will be great it they can de-leverage the balance sheet a bit and bring down the debt to more comfortable levels.
Yes, it would be great if one can get management interaction here.
Hi Ayush,
Kovai is trading at PE > 9 (ttm). What, in your opinion, will be a fair valuation for Kovai ?
Thanks,
Vinod
Hi Vinod,
If you look at the superb free cash flows the business has and the sustainability part, I think cos like these should easily trade at more than 10 PE.
Hi Ayush,
Thanks for a good write up.
On cash flows.
Even indraprastha medical has operating cash flows of 54 crores on a market cap of 304 crores with just 52 crores of debt.
Comparing EV/EBITDA of Kovai with indraprastha
What happenes when Kovai is fully operational? It’s cash flows/ EBITDA goes up and it’s debt goes down and ultimately we land up with another indraprastha.
Do you agree with with what I am thinking? Or you think that Kovai is a lot different?
Regards,
Hi,
Have tracked Indraprastha Medical and I think the difference lies in the growth prospects. Kovai has been growing at almost 25% for a long period while Indraprastha’s growth has been at about 15%. Also, it seems the promoters are not very aggressive in Indraprastha due to ownership structure and problems due to govt. participation. Hence I think Kovai is better placed
Thanks for your reply
Even after 2 years of higher growth indraprastha would remain more attractive than Kovai on EV/EBITDA basis.
Agreed indraprastha is JV but the location of the hospital is far more attractive so as to command a premium
Hi,
In the EV/EBITDA calculation, try looking at the market cap, if the co is to repay debts. I think, given the excellent cash flow, reduction in debt is quite possible.
Hi,
This is Abhay closely watching your discussion and trying to follow up also,
I would just like to add a very small point to all your calculations though I don’t know how to translate it into investment decision .
It is the fact that kovai apart from its business model is situated at a place in coimbatore where the real estate cost is not less than 5000 rs per square feet ( here Iam just Indicating a situation wherein we are trying to just build a new hospital )
And a 20 acre land shall cost even the most and most conservative standards rs 350 crores and the market cap is less than 200 crores??
What’s the valuation for the business where now real estate is practically not a contributor??
What’s the value of an enterprises goodwill that too in a sensitive zone like health care???
So in my layman terms how shall you conservatively value kovai medical
Realestate price plus business eps plus any bare minimum goodwill valuation????
Does that translate somewhere
Around 700 plus???
Can the market give this valuation???
For varities reasons Iam completely with Ayush and
Would prefer to take a big exposure at a proper time !!!!
Comments expected to make my conviction more practical friends !!!!
Hi Abhay,
Yes, the real estate and goodwill are additional comfort points. However, we shouldn’t bank on them as these would come into consideration during takeover/sale time only.
For normal times, earnings are the critical factor, IMHO.
I think you are not assessing the investment opportunity in Kovai correctly ! – You mention that conservatively you would give a valuation of Rs350crs to the RE of the business. This value will emerge in the case of company liquidation, in which case the debt of Rs225crs must be paid before distribution to equity shareholders, which comes out to be Rs125crs (v/s Mcap of Rs175crs ). Now if we are estimating the economic value (goodwill) that the business generates, we will have to calculate the earnings assuming the real estate does not exist and the company pays a rent/lease to operate. Then adding the RE value + Business value will give a good sense of the intrinsic value. What you are doing amounts to double counting, hence an over-estimation of fair value.
Ayush has got it right when he says deleveraging of BS will be a trigger. History suggests that when deleveraging takes place value creation is enormous – this is because there is double impact, earnings expansion and multiple expansion. Wockhardt is a good example of how value is created when de-leveraging is done right. Happy Investing!
Hi…
whats your view on FORTIS at CMP 98. Company has low debt but various expansion plans are eating up most of the profits. But once all hospitals are fully functional, hope in 2 years,companys profitability is sure to multiply and it will also effect the share price.
I hope its a good bet at present with time frame of 3 years.
Sorry, we don’t track the same.
Hi Ayush,
What is your view on Sree Rayalaseema Hypo. The stock seems to have taken a beating
Thanks
We feel the stock has a lot of potential and is undervalued at current levels.
Hi Ayush,
Do you see value in Smruthi at these levels? It has been beaten down to quite a level just for couple of lackluster quarters. Do you know of any serious concerns plaguing Smruthi?
Regards,
Roberto
Hi,
We do feel it has value at these levels if one has a longer term perspective. On the negative side – yeah its concerning that the co hasn’t been growing despite undertaking a major expansion. Hence one should try to understand the reason for the same.
Ayush,
Whats your take in Cap goods sector with anticipated rate cut and how do you see ELECON Engg and TRF in that sector?
thanks
The sector is out of flavor and certainly has value however, concrete steps are needed to push start capital investment climate in the country.
Hi ayush
If i remember you had scheduled an interview with lumax management…
Any details or note of that will help a lot in incresing the conviction on lumax…
Regards
Hi Pratik,
The interview with mgmt couldn’t be setup. Will update if it happens.
Hi Ayush,
Kovai Medical is in the illiquid list of SEBI & has call auction mechansim going on.
With this thing in place, do you think it will get rerated even after good numbers?
Will there be enough buyers for it in future?
& what if performance is not as per expectation? Won’t it be difficult to sell this?
Regards,
Amit
Hi Amit,
Yes, the recent call auction rule has covered almost 2200 stocks and has made trading even more illiquid. We feel this is a bad rule and detrimental to investing and request everyone to oppose the same. We had covered it here – http://alphaideas.in/2013/04/25/day-long-call-auctions-hurting-the-indian-markets/
Illiquidity has its both positives and negatives. If the co is actually good then one also gets a scarcity premium and at times stocks get re-rated more and faster too. On the negative, yes, if there is a negative, it may be tough to exit. This is why one needs a bit diversified portfolio while investing in this space.
hi ayush,
what your views on N G INDUSTRIES LTD( BSE CODE 530897)?
hi ayush,
what your views on N G INDUSTRIES LTD( BSE CODE 530897)?
Hi Ayush…
After applying some rigorous filters, I was able to short list –
“Panama Petrochem”
Can you pl look into the fundamentals of it ?
Sorry, we don’t track the same. Based on some interactions with friends, plz check on the quality of mgmt.
How does one check on Quality of Management ?
By going through past annual reports and analysing if they have created value for minority or not.
Hi Ayush,
What % of your portfolio are you accumulating this stock? I think you guys are a genius but the one information that’s not posted anywhere is the weight-age you make on investments, relatively.
Thanks!
-Prasanna
Hi Ayush,
At the current pricing, it looks like the annual returns from the stock are at around 17.5%; What returns do you usually target before getting a stock in your portfolio given the constant on-going work you need to perform, and also considering the other opportunities that are usually available to you?
Thanks!
-Prasanna
ROE = 25%; P/B = 2.21; Payout ratio = 10%
IRR = (1/2.21)(1 – (1-.25)/(1 + .25*(1 – .1))) = 17.5%
hi ayush
am holding wimplast for the last 3 years at the rate of 180 (15000) am ready to hold it for 2 more years whats ur take on the same
Its a good company, you may like to hold on as your entry price is good. Personally, we have exited after slow growth in recent results. There are good new ideas available.
Hi Ayush, Wimplast has increased its dividend payout by 33.33% per share this year. They have also commissioned their kolkata plant from 15th March. How can you say that growth will be slow after they plan to capture market share in eastern india?
I’m not saying that the co will have slow growth. The last qtr was slow and as the price was good, we exited.
any body here has a ny views on wimplast
hi ayush how do u find laopala an wimplast am holding the shares for the last 2 years
Sorry, not tracking them closely now. We feel some of the others ideas we have discussed may have better prospects
hi can u suggest some good stocks for a long term investment
Hi Ayush,
Can you please confirm the source for Kovai’s utilisation rate? Are those numbers specific to the main centre or applicable to all centres?
The data is based on the care rating reports. I think the nos are for the main centre
Thanks, have a good day!
Hi Ayush,
I just had a look at this company. I generally stay away from companies that have more debt than equity but this one looks interesting because of the space they are in and their superior ROE which is one of its kind in this industry. However it is a very capital intensive business with the company generally needing to throw more than 1 dollar to increase 1 dollar of sales initially. Based on my reading through the AR i could see that consistently they have been showing more tax outgo in P&L than what they have actually paid. I am not sure if there is any aggressive accounting in this regard. Do you have any idea why they are paying lesser taxes and adding it to their deferred taxation?
Also, it looks like they capitalize borrowing cost/interest cost. They capitalized around 9 cr in 2012. Are these red flags? Just want to check you opinion on the quality of the account in your opinion.
Even though they are not precariously leveraged, there is always this black swan possibility where they will have tough time if the interest rate goes up from here.
Looking forward to your thoughts.
Regards
Ravi
Hi Ravi,
While studying this co, I was also impressed by the consistent growth of about 25% over the years and good ROE. Its not easy to be able to built a good hospital in a cpl of decades from a small start. Also if managed well, hospital business is good and can throw consistent cash flows.
The problem is that its quite a capital intensive business and if someone is ambitious he may like to keep expanding by taking debt which may not good be for shareholders….as high debt is not good and something can go wrong.
Coming to your specific queries:
1. I think its good that the co is providing for proper taxes. The payout is lesser as the Income Tax allows the same whenever the capital expenditure is done (as depreciation as per Income tax is higher and hence profits lower in initial years)
2. They must have capitalized the interest as they were expanding the hospital for Cancer block. Its normal as per accounting norms.
As of now the leverage looks ok given their strong cash flows…ideally I would like the co not to expand much till debt comes down to say 1:1
Hey,
Its been so many days since last update, Kindly share present scenario in Kovai Medical