Shalby Hospitals: Owner-Operated, Growing, Efficient Hospital Chain

Amit Chander of Baring Private Equity Partners India presented his in-depth investment thesis on Shalby Hospitals (India: SHALBY) at Asian Investing Summit 2020.

Thesis summary:

Shalby Hospitals is India’s seventh-largest hospital chain in terms of bed capacity. Founded by a reputed orthopedic surgeon, the hospital is a market leader in the field of joint replacement surgery. In the last six years, the company has undertaken significant capex, expanding bed capacity three-fold and increasing the scope of services to position itself as a multi-specialty platform. The share of joint replacement surgeries is down to 48% of revenue, with increasing contribution from oncology, cardiology, neurology, and nephrology. Shalby has a track record of being an extremely efficient operator, with lowest capex per bed in the industry and with tight management of doctor costs and overhead. It has industry-leading margins. Mature hospitals in the Shalby network sustain ROCE in excess of 25%.

Due to high FCF generation from mature units, only 40% of the expansion was funded with debt, which was repaid from IPO proceeds in early 2018. Debt to equity recently stood at 0.2x. Post-IPO growth has not kept pace with inflated investor expectations as the new units have been in ramp-up phase. The new hospitals have broken even, and earnings are positioned to accelerate due to strong operating leverage in the system. Revenue growth is likely to be 10-11% (underlying market growth), with 16% profit growth due to operating leverage.

Mr. Market seems to have lost patience, and the pre-COVID stock price had dropped to a 70% discount to the IPO price, implying EV/EBITDA of 7.7x and P/B of less than 1.0x, putting zero value on the new hospitals, resulting in an attractive risk-return tradeoff. In light of COVID-related lockdowns and the postponement of routine doctor visits and elective surgeries like joint replacement, business will likely suffer in Q1, and the share price has fallen further in anticipation of this weakness. Hospitals should see faster business recovery as activity normalizes given the essential nature of the services. Leading Shalby is a 55 year-old founder who is highly driven, ambitious, and actively involved in running the business, with high alignment of interest (80% post-IPO stock ownership).

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About the instructor:

Amit Chander is a Partner with Baring India – a spin out from ING Barings with USD 750 Mn in assets under management. He manages investments for the firm in public and private companies across multiple sectors (Healthcare, Technology and Financial Services) and over the last 14 years has built a strong performance track record having led investments of ~USD 200 Mn with top quartile returns and outperforming sector benchmarks.

Amit’s investment approach to pick multi-bagger stocks is predicated on combining top down research in focus sectors with bottom up fundamental analyses of companies and assessment of management teams for alignment of interest with minority shareholders. Portfolios are then constructed and optimized from a risk-return perspective from pools of such companies using value investing principles. He has been able to implement this approach systematically across cycles to generate a fairly distributed performance with minimal loss ratio. Amit was profiled in 2014 as among Top 5 Rising & Successful Fund Managers by leading Indian business daily Economic Times. As company spokesperson Amit also represents the firm in industry events and is quoted in media as a subject matter expert.

In his prior roles, he worked in financial advisory and business consulting with leading Indian and multi-national companies. As a manager with the world’s fourth largest and India’s most influential credit rating and policy advisory company, CRISIL (a subsidiary of Standard & Poor’s), he was involved in advising clients on equity divestments, financial restructuring, and business strategy. Subsequently he worked with Accenture – a leading global management consulting, technology, and outsourcing services company where he assisted clients on implementing technology-led large-scale business transformations ranging from e-governance to e-commerce.

Amit is an Engineering graduate from the Indian Institute of Technology (IIT), Delhi where he received the Director’s Silver Medal for being Rank #1 in his Department; he also holds an MBA from the Indian Institute of Management (IIM), Lucknow.