Event update: HealthCare Global Enterprises (Outperformer) - Comparable transaction reaffirms attractive valuations

Event

TPG capital has sold its chain of cancer treatment hospitals, Cancer Treatment Services International (CTSI) to US entity Varian Medial Systems for $283m

Key Highlights

• CTSI has a network of 11 hospitals with a pipeline of 6 more assets across India / South Asia; It had one hospital 3 years back – operating model is similar to HCG
• As per Varian press release, CTSI had annual revs of ~$43m; it is expected to be EPS accretive by 2021 – implying limited (or maybe even negative profitability) at current levels
• This transaction effectively  values CTSI at ~6.5x revenues
• More information can be found in the press release:
• For reference, HCG currently has 20 operational oncology centers with ~$125m oncology revs (~3x of CTSI) with ~12% EBITDA margins; HCG Current consol EV is ~$340m
• This effectively values HCG oncology biz at < 3x revenues at a sharp discount to CTSI transaction multiples
• Further, this valuation implies nil value to HCG’s other business segments including IVF and multispeciality hospitals as well as its investment in high end diagnostics

Valuations & view

HCG’s business model is custom designed to provide comprehensive cancer care at competitive prices on a pan-India basis, with focus on non-metro locations. The company’s asset-light approach with focus on partnering has made its business model capital efficient and scalable. The fertility treatment segment, operated under brand Milann, follows broadly similar tenets. HCG is among the most scalable Indian healthcare models, with focus on high-potential cancer care/fertility segments. The successful ramp-up of recently commissioned centers, as reflected in its breakeven within 12 months of commissioning and limited start-up losses, significantly enhances comfort in the model’s scalability. Steady growth across 18/9 existing/new cancer centres should trigger 20%+ revenue/earnings CAGR over the next 3-5 years, with limited incremental capex spend. Given HCG’s strong growth visibility and unique business model, we maintain our Outperformer rating on the stock target price of Rs293 (16x FY21E EV/EBITDA).