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Bulls behind, Bears Ahead?

Was it bad timing or an over-priced IPO that led to the failure of Wockhardt IPO? Nancy Singh analyses

When a promising 'star' in healthcare fails to put up a good show, you can envisage a boardroom resonating an edgy, upset, vexed ambience— and this holds true not only for Wockhardt Hospitals Group, but other healthcare giants who were about to follow in the footsteps of this Goliath.

Whilst all the big plans of the bigger groups have been put on hold, reverting the spotlight to the Wockhardt IPO, it is time to delve into the rationale behind its failure and attempt to understand the dynamics of the IPO and market sentiments. The Wockhardt management has refused to divulge further details of the issue, of which Citigroup and Kotak Investment Banking were the lead managers. "At the moment, it's too early to comment on anything. We are just in the process of recovering through this phase. But we are still very positive about our business model and expansion plans," says Vishal Bali, CEO and MD, Wockhardt Hospitals Group.

In the entire market volatility saga, Wockhardt's IPO became the first casualty, forced to reduce its price band from Rs 280-310 to Rs 225-260, for its Rs 800-crore issue, which opened on January 31. It was originally scheduled to close on February 5 but was extended by two days to February 7. It was finally shelved, as it could sell only 20 per cent of the 25 million shares that it floated.

A Question of Price

"The issue appeared expensive on a market cap to sales basis when compared with its listed peers" - Alok Dalal Research Analyst Religare Securities Mumbai

So, what went wrong? The price, say market pundits. "The issue appeared expensive on a market cap to sales basis when compared with its listed peers like Apollo Hospitals and Fortis Healthcare," explains Alok Dalal, Research Analyst, Religare Securities, Mumbai. The issue had been subscribed only 0.16 times.

Echoes another expert on request of anonymity, "If you compare the market cap and the EBIDTA margin of Wockhardt with the biggest giant Apollo (70,000 beds), it was highly overpriced." Analysts ask, when a well-established player like Apollo, which is five times bigger in terms of sheer bed-strength, has a stable revenue model and is available at an EV/EBIDTA (Enterprise Value/ Earnings Before Interest, Tax, Depreciation, and Amortisation) of 20 times, why would anyone opt for a company which is presented at an EV/EBIDTA of 68 times and that too with a high execution risk? (See box for valuation).

However, research analysts give a thumbs-up to Wockhardt's business model and feel strong about its growth plans, considering the huge demand-supply gap in healthcare. One analyst from an investment and financial advisory house opines, "With this model and healthcare demand on the upswing, growing the business would not be a problem. However, with rapid expansion and lower occupancy rates over the next one year and entrenched competition, it would be difficult to improve margins significantly."

Given that Wockhardt gets gross average revenue of Rs 50 lakh per bed per year for a super-speciality hospital and Rs 25 lakh in a regional hospital, it should be closing FY09 with returns of Rs 446 crore. Regardless of expansions and therefore lower occupancies, margins are expected to stabilise, relying on higher proportion of foreign patients, as their charges are significantly higher than local patients. Moreover, the company believes that decreasing the average length of stay, rise in occupancy rates and improvement in average income per bed, would facilitate maintaining margins.

"Nothing was wrong with the company, but everything was with the market. The sentiments are really low" - Jigar Shah Investment Advisor KR Choksey Securities Mumbai

"The purpose of an IPO, for investors, is to buy it at a lower price and sell it on the day it is listed but these IPOs had high rates" - Suresh Saraogi Managing Director Keynote Capital

While this industry is known as a sunrise industry and long-term prospects seem good, the pricing of the issue left little scope for appreciation for investors in the short-term. Says an analyst from one of the fastest growing investment banking and financial services companies, "In all probability, all that went wrong was the pricing. It was way too expensive. All the recent IPOs and the way they were priced are a lesson to be learnt from. Barring the Reliance Power IPO of ADAG which was priced very aggressively, others received flak from the market."

Suresh Saraogi, MD, Keynote Capital, concurs, "Wockhardt IPO's fate was quite surprising, but not unexpected. Even Emaar had to withdraw its IPO. When other listed stocks are available at much cheaper rate, why should you invest in it? Just recently GSS America floated its IPO and barely had 80 shares on day one." He adds, "Pricing should be reasonable. It's fine if you have 3-4 times the multiples but 10-12 times Price Earning (PE) multiples coming at this bearish time would do no good."

Wockhardt's Expansion Plans

Wockhardt Hospitals Group is a forerunner in the private healthcare services space in India with focus on specialities-cardiology, orthopaedics, neurosurgery, nephrology, urology and critical care. It has a network of 10 super-speciality hospitals and five regional speciality ICUs spread across western, eastern and southern India. Amongst these, six are greenfield properties, while the rest correspond to brownfield expansion. The company also owns and operates ten pharmacies on its facilities. Wockhardt Hospitals is adding three greenfield hospitals (one each at Kolkata, Mumbai and New Delhi) and is expanding the bed capacity at Wockhardt Heart Hospital, Mumbai. In addition, Wockhardt Hospitals will also add six brownfield hospitals at Goa, Bhavnagar, Nasik, Bhopal, Ludhiana and Jabalpur. On completion, the expansion will add 2,127 beds, raising the capacity from 1,374 beds end December 2007 to 3,501 beds end December 2009. Says an analyst, "One of the strongest points of Wockhardt group is that it is focusing highly on tier-II cities which many other groups have not been able to penetrate yet." Wockhardt Hospitals has gone in for a MoU with Al Bateen Investment Co, an Abu Dhabi-based company, to provide expertise in setting up, managing and operating hospitals to a Special Purpose Vehicle (SPV) that will engage in healthcare initiatives in Abu Dhabi. A greenfield hospital specialising in women and child care would be the first venture. The SPV will also look at brownfield prospects in Abu Dhabi. The expansion plan requires a capital expenditure of Rs 636.35 crore and will result in a pan-India presence for Wockhardt Hospitals. It has already spent Rs 66.88 crore on the expansion plan end December 2007 and intended to fund the balance of Rs 569.47 crore by tapping the capital markets. In addition, the company wants to utilise around Rs 285 crore of the IPO proceeds to pre-pay short-term loans. The worry for the company had been on the interest front, which has quadrupled to over the last three fiscals to Rs 23 crore in December 2007 from Rs 5.7 crore in 2006. Around 2.51crore equity shares were being offered by Wockhardt Hospitals. Of these, five lakh were for employees. As such, the net offer to the public was around 2.46 crore equity shares. The company raised around Rs 149.33 crore by making two pre-IPO placements with BCCL (16,12,903 equity shares at Rs 310 per share) and with CGMMPL (33,00,000 equity shares at Rs 301 per share), constituting 1.5 per cent and 3.2 per cent of the post-issue equity share capital, respectively. The Weak Points Real estate price in Mumbai and two land possessions in Bangalore accounted for around 71 per cent and 68 per cent of total income in the year ended FY 2007 and in the nine months ended December 2007. These three hospitals collectively comprised around 35 per cent of the total bed capacity. Due to this concentration, any negative economic, regulatory, competitive or other developments may adversely impact the operations, and disturb the financial performance. The Bannerghatta Road, Bangalore, and Kolkata properties are also enmeshed in litigation. Upcoming hospitals in Kolkata and South Mumbai are also the subject of litigation, and so also three-brownfield properties at Nagpur, Rajkot, and Vashi and Mumbai. Wockhardt’s Issue Highlights Sector: Healthcare. Number of shares for fresh issue: 25087097. Number of shares reserved for employees: 500000. Net issue to the public: 24587097. Price band (Rs): 280-310. Revised Price band: Rs 225-260. Post-issue equity: (Rs crore) 104.28. Post-issue promoter and promoter group stake:(%) 71.20. Issue open/close: 31/01/08- 05/02/08 - Extended till 07/02/08 Listing BSE, NSE.

Sad Subscriptions

The subscription figures for Wockhardt are 0.006 times High Net Individuals (HNIs), 0.06 times Qualified Institutional Buyers (QIBs), 0.3 times retail, and overall 0.2 times. Says one more expert, "These figures are eight days after an issue opened and that too with the bandwidth that Wockhardt demands. It would be very hard since at the top-end of the original price band, Wockhardt was talking about raising Rs 700 crore. Now, the question is, if that capital is needed, where would it come from?"

Wockhardt did revise their issue price, but while Apollo Hospitals is going at about 24-25 times one-year forward, Wockhardt Hospitals is going at 78-79 times one-year forward. "It is also more expensive than Fortis was, and even Fortis has barely made any money for its investors. So, this is a telling statement. It would be very interesting to see what the next step is, in terms of fundraising from Wockhardt," says Sandeep Shenoy, Strategist, Pioneer Intermediaries.

Wrong Timing?

Considering the market meltdown, fingers are pointing to the bad timing of the IPO. Market gurus had already predicted late in January after the market had just crashed that the impact was likely to hit IPOs as well as New Fund Offers (NFOs) by mutual funds in the capital market.

Wockhardt management was concerned by the volatile market but went ahead with the issue on the subscribed date. Shenoy argues, "I don't think pricing was an issue as such, as I think it was not an extremely aggressively priced one, but the market environment is such that it is not ready to take anything. Its appetite for risk capital has reduced considerably. I think if you compare even the price at which Fortis was listed, it was an aggressive one. Hence, timing is the key."

The opinion on timing is currently divided. Dalal disagrees, "I don't think timing is the issue here. Yes, one can say that this was not the best time for any company to come out with an issue as the appetite for IPO has gone down after the correction in the secondary market. More than timing, it is the pricing that is keeping the investors away and hurting the company today. I believe the IPO would have received a good response had the pricing been more undemanding. We must remember that after the fall in May 2006, Tech Mahindra also came out with an issue which received good response despite volatile market conditions because of its strong fundamentals and its attractive pricing. Recently, IRB got good response in a bad secondary market."

Industry Reacts

Concerned by the Wockhardt IPO, we have postponed our IPO from this April to next year Dr NC Borah, Chairman, GNRC, Guhawati The group had plans to raise around Rs 100 crore through IPO and will try and raise Rs 25 crore through private equity

I don't think there was any problem with the IPO. The main problem is the market and not the issue. It's more of a sentiment. But having said that, I think even pricing should have been re-considered. Pervez Ahmed, Executive Director, Max Healthcare The company hopes to go in for an IPO at the "right” time.

A Sentimental Issue

Somewhere down the line, analysts feel that sentiments do play a key role in investments. If the market is euphoric, then even a company with bad fundamentals manages to get a decent opening and during bad times even companies with strong fundamentals fail, just like many IPOs did this season. Says Jigar Shah, Investment Advisor, KR Choksey Securities, Mumbai, "Nothing was wrong with the company, but everything was with the market. The sentiments are really low. Indian investors are not interested in 'futuristic' companies. They look at cash flows. These companies take time and require long-term investment. Pricing and timing are co-related. The sentiment is currently very bad and the market is not ready to accept any issue available at a hefty premium. When the market is doing well, even if you give PE at 20 times, it would be accepted but anything beyond that would not be appreciated or accepted."

There indeed seems to be some rationale behind the manner in which sentiments rule market. Because it is not only just Wockhardt that was killed by the bear. Emaar MGF withdrew its IPO on concerns about the market sentiment and high pricing. And even the historic Reliance Power IPO 'short-circuited' the Sensex on day one of listing. Reliance Power listed below issue price, tripping retail investor sentiment. The company had collected a record of Rs 7.50 lakh crore. The index faced its third biggest fall ever on February 12 and investors lost around Rs 2.18 lakh crore.

Sensex Stutters

In fact, Emaar MGF had revised its price band twice. It was initially priced at Rs 610-690, which the company reduced to Rs 540-630, and with insufficient subscription they extended the issue till February 11 and changed the price band to Rs 530-630. The Emaar MGF IPO subscription was over 0.84 times but with the sudden withdrawal of bids by QIBs and HNIs, the subscription dropped to 0.43 times which made the company rethink its IPO plans and eventually announce the withdrawal. "The purpose of an IPO, for investors, is to buy it at a lower price and sell it on the day it is listed but these IPOs had high rates, coupled with the fact that the investors are not willing to take any risk at this time when the sentiment is hardly bullish. In the future, this is a lesson learnt that they should at least provide a discount," reacts Saraogi.

Barely a month ago, there was no stopping the Sensex. On January 10, the index had touched a record high of 21,207 and local companies had planned to raise a record of Rs 64,000 crore by issuing new shares. With this sudden meltdown, all the plans now seem to be just a pipe dream. The changing tide is an indication of the altering sentiment. Euphoria is now replaced by fear. Some of the losses have been due to slowing investment by foreign investors. Until February, FIIs have withdrawn $3 billion as against $17 billion invested last year.

On January 21, the Sensex plummeted 1,408.35 points (7.41 per cent) to 17,605.35 — this was the lowest since October 22 last year. On that dramatic day, the Bombay Stock Exchange (BSE) closed its trading twice — at 2.49 pm and 2.52 pm—for the first time since October 2007 (when checks on participatory notes created panic). Panic gripped the Indian market after the benchmark indices plunged to their lowest as the US recession fears brought down stock prices, across the globe, wiping off $4.45 trillion in values. The market has still not recovered from the bearish trend. On the home front, interest rate hikes that RBI had implemented last year to fight inflation, are still taking their toll on the economy's growth.

Taking the Long-term View

The country's healthcare sector is evolving rapidly. Healthcare-spend equalled around US$ 35 billion or 5.2 per cent of GDP in 2004. India's healthcare industry, valued at US$ 23 billion, is in a sunrise phase. India spends only 5.2 per cent of its GDP on healthcare as compared to 6.5 per cent for a comparable economy like Brazil.

The country has only 1.5 beds and 0.9 nurses per thousand population, which is far short of the average 4.3 beds and 1.9 nurses in middle-income countries. According to CII and McKinsey data, the Indian healthcare space will require an investment of US$ 78-89 billion over the next five years, of which 90 per cent is expected to come from the private sector.

Growing at a compounded growth rate of 12 per cent, healthcare-spend would rise to around US$ 60 billion by 2009. "Healthcare is and always will be a long-term investment. The kind of industry it is and the model within which it functions, is stable and only those who have a very long-term view will try their hands at it," says Shenoy. The growth would be invigorated by the changing demographic profile, rising lifestyle diseases and increase in medical expenses. Gradually, rising popularity of health insurance and growing medical tourism would also contribute to the expected growth. As private players are expected to continue to control the majority of the healthcare expenditure, players such as Wockhardt Hospitals would be major beneficiaries of the boom.

"Rising incomes, higher medical insurance reach and medical tourism are key growth drivers for the sector over the next few years. However, the sector is still in a nascent stage and will take some time to generate returns for investors. Hence, it is only recommended for a patient investor with a three to five year horizon," says Dalal.

Thus, even as this sunrise sector is gearing itself to shine brighter in the up coming years, as of now the investors are not preparing themselves to make hay when the sun will shine!

nancy.singh@expressindia.com