SRL Diagnostics, the country’s largest diagnostic chain, owned by brothers Malvinder and Shivinder Singh, has caught the attention of large global private equity funds.
Buyout funds such as KKR, Warburg Pincus Llc. and Baring Private Equity Asia have shown interest in buying the 34% stake held by existing investors, according to two persons familiar with the matter who asked not to be identified. These investors include International Finance Corporation (IFC), NYLIM Jacob Ballas and Avigo Capital Partners. Fortis Healthcare Ltd holds about 57% stake while promoters hold the remaining equity in SRL Diagnostics.
Across India, SRL Diagnostics had 11 reference labs and 273 network laboratories with over 6,700 collection points as of 31 May 2015.
Spokespersons for KKR, Warburg Pincus, Baring Asia PE and SRL Diagnostics declined comment. Spokespersons for Avigo Capital and Jacob Ballas also declined comment. A spokesperson for IFC didn’t respond to an email seeking comment.
Investment bank Moelis is advising SRL on the stake sale.
“Following the successful listing of Dr Lal PathLabs, expectations from SRL are running high and the company is looking for a valuation of about Rs.3,500-4,000 crore,” said one of the two persons cited in the first instance.
Besides KKR, Warburg and Baring, three other global funds have evinced interest in SRL, he added, without taking names.
The second person added another name—Bain Capital. A spokesperson for Bain Capital declined comment.
The initial public offering (IPO) of Dr Lal PathLabs Ltd, which closed in December, was oversubscribed 33 times. On the first day of listing, the shares gained 50% over the issue price of Rs.550 per share. The shares, which touched a high of Rs.908 apiece on 28 December, closed at Rs.798.75 on BSE on Wednesday.
This strong response has excited both existing and potential investors in companies with similar business profiles.
At an enterprise value of Rs.3,500-4,000 crore, the 34% stake owned by the PE investors in SRL will be valued around Rs.1,200-1,360 crore.
“Normally, 13-14 times Ebitda (earnings before interest, taxes, depreciation and amortization) would be a reasonable valuation for such businesses. However, SRL Diagnostics with a Rs.180 crore Ebitda is looking for a valuation of 20-22 times Ebitda, which seems to be too high,” said a fund manager who chose not to pursue the deal because of this high valuation expectation. This person asked not to be identified.
In 2011, Avigo Capital Partners picked up 9.27% in SRL for Rs.100 crore which valued the company at about Rs.1,000 crore then.
In September 2015, another investor Sabre Partners, which held a minority stake in SRL, sold its entire stake in SRL to Fortis Healthcare for Rs.105 crore, making a two times return on its initial investment. Sabre’s exit price valued SRL at Rs.3,395 crore.
Interestingly, KKR and Warburg already have investment experience in the diagnostic space through their interest in diagnostic chain Metropolis Healthcare Ltd.
Last year, Warburg Pincus sold its five-year-old investment in Metropolis to the promoter family for Rs.550 crore. Warburg sold its 27% stake at an enterprise value of Rs.2,035 crore; the Shah family bought back Warburg’s stake with the backing of KKR.
In September 2015, US-based private equity firm Carlyle Group also entered the domestic diagnostic sector by acquiring 37% stake in Metropolis from former promoter G.S.K. Velu.
“The potential in the Indian diagnostic space is huge and only a few organized sector companies are present at the national level. Hence, investors’ interest for stake in top players remains high,” said a Mumbai-based investment banker who spoke on condition of anonymity.
The successful listing and the kind of return given by Dr Lal PathLabs will also bring more investors into the space, he added.
The domestic diagnostic market is highly fragmented and has an estimated size of Rs.37,700 crore.
The industry is expected to grow at a compounded annual growth rate of 16-17% to reach Rs.60,100 crore by fiscal year 2018, according to Crisil. Standalone diagnostic centres hold about 48% of the market, according to Crisil, even though this position in the market may not translate into pricing power.
“The specialized tests which require expensive infrastructure and economy of scale has led to formation of diagnostic chains in India, through the hub and spoke model. The fragmented nature of industry indicates low pricing power of service providers,” said a 4 December report from IndiaNivesh Securities.