India: Healthcare IPOs get a thumbs up as investors lap up shares

Investors have lapped up shares on offer from healthcare firms, two of whom closed their initial public offerings (IPOs) on Thursday, as they seek to gain greater exposure to the rapidly growing sector. The positive investor sentiment could help upcoming issues, including a Rs.613 crore share sale by the Devi Shetty-led Narayana Hrudayalaya that opens next week.

IPOs of drugmaker Alkem Laboratories Ltd and diagnostics firm Dr. Lal PathLabs were both heavily oversubscribed.

Alkem Laboratories, which was looking to raise Rs.1,350 crore, saw its issue subscribed 44 times, with the high net worth individual category subscribed nearly 130 times.

Dr Lal PathLabs saw its IPO subscribed 33 times with institutional investors putting bids worth 63 times the allocated amount.

Earlier this year, Syngene International Ltd, a contract research and manufacturing subsidiary of Biocon Ltd saw its issue heavily oversubscribed. Since listing on 11 August, the stock has surged 45%.

“One of the reasons why we are seeing such strong interest from investors, both institutional and retail, for these healthcare stocks is that these companies have a very strong track record and they are businesses with very high growth rates,” said S. Subramanian, managing director for investment banking at Axis Capital.

He adds that most companies in the sector have strong cash flows, another reason why
investors are keen to invest in them.

Narayana Hrudayalaya Ltd will open its Rs.613 crore share sale on 17 December. The company plans to sell shares in the range of Rs.245-250 per share.

According to some bankers, investors are also drawn to healthcare companies since there are relatively few of the genre listed on the exchanges. Munish Aggarwal, director at mid-market investment banking firm Equirus Capital Pvt. Ltd, pointed out that healthcare is significantly under-represented on the equity markets.

“Healthcare as a percentage of the listed stock universe is significantly under-represented, so appetite-wise, there should not be any challenge. If you compare the gross domestic product (GDP) contribution of healthcare sector to the contribution of listed healthcare stocks in the overall market capitalization, there is a huge gap,” said Aggarwal.

And companies in the sector aren’t dependant on economic growth to grow, he added.

“All said and done, healthcare services are a need rather than a luxury and many of these businesses will see a secular growth trend.”

According to the Global Health Expenditure Database compiled by the World Health Organization, India’s total expenditure on healthcare was 4% of GDP as of 2013.

India trails not just developed countries such as the US and the UK, but also developing countries, such as Brazil, Russia, China and Thailand, in healthcare spending as a proportion of GDP.

This is primarily due to the under-penetration of healthcare services and lower consumer spending on healthcare.

Another factor which draws investors to healthcare firms is the strong performance of listed companies in this segment.

In the last 10 years, the BSE Healthcare index has seen compounded annual gains of 15.21% compared with 6.18% for the benchmark BSE Sensex.

“The sector has had a very strong growth over the last few years and it has been led by continued geographic expansion. Overall, the last decade has been fantastic in terms of both revenue and earnings growth for companies in the pharmaceutical space. Large part of their revenue comes from regulated markets but they have also managed to grow in double digits in the Indian market,” said Abhishek Sharma, research analyst at IIFL.

According to an analyst with a foreign brokerage, the top five pharmaceutical companies have reported a compounded annual growth rate of 15-16% in net profit. He declined to be identified as he is not authorized to speak to the media.

To be sure, some of these firms are now facing significant compliance concerns. mostly to do with manufacturing and documentation practices at their factories that do not meet US Food and Drug Administration (FDA) requirements.

“Approvals for new drugs have slowed down and in the last one year we have seen more cases of USFDA issuing notices with respect to compliance issues in the country,” the analyst added.

But the sentiment towards the broader healthcare space is still strong, prompting a number of private equity-backed companies to consider a public listing.

Oncology firm HealthCare Global Enterprises Ltd, which received approval from the Securities and Exchange Board of India for its IPO last month, is expected to launch its issue in the first quarter of 2016.

Hospital chain Aster DM Healthcare and diagnostics firm Thyrocare Technologies Ltd are also planning share sales.

“Healthcare spending as a percentage of GDP is over 20% in western countries, whereas in India the number is just around 5%. So there is a lot of room to grow for the industry and businesses,” said Sohil Chand, managing director, Norwest Venture Partners, which is an investor in Thyrocare.

There is also a demand-supply mismatch for investors because of the small number of listed healthcare firms, Chand added.

This article was first published on Livemint.com

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.