Aster DM – Share Buyback Offers Little Upside

Aster DM

On Thursday, Aster DM Healthcare said that its board of directors approved a proposal to buyback up to 57.14 Lakh equity shares (1.13%) of the company for Rs 120 crore at the rate of Rs 210 each.

Prima-facie the offer looks attractive which is almost 26% higher to its prevailing market price.

However, when considered with the initial public offer (IPO) price of Rs 180-190 per share, the scenario drastically change.

Not only it loses price advantage but the likelihood of shares tendered in the buyback plan are very less.

This observation stems from the fact of the shareholding pattern.

As of December 2019, the Public shareholders together own 5.85% while the Promoter group (37.80%) and Overseas institutional investor (51.40%) continue to dominate.

If the share buyback done on a pro-rata basis, there is little in the offing for public shareholders.

Aster DM healthcare, the Dubai headquartered healthcare services provider, is the third-largest player in the healthcare segment in India by market capitalization.

The company, founded in 1987 by Azad Moopen who hails from Kerala, India, raised Rs 980 crore through IPO in February 2018.

Aster DM’s strong financial strength and revenue growth guidance will enable the healthcare services provider to fund its buyback plan.

It is eyeing 25% of its total revenues from India operations in the next 3-5 years as it undertakes a slew of initiatives to scale up its business in the country.

The Dubai-headquartered firm operates 13 hospitals and eight clinics in India. 

Aster DM Healthcare posted Rs 7,963 crore in revenue from operations for the fiscal year 2019. Around 85% of this was from GCC countries and around 15% from India operations.

It plans to increase the capacity utilisation of its facilities in India from the current 60% to up to 75% which is optimum.

It will make significant improvements in revenue.
 
The company has announced plans to open two hospitals in Bengaluru, which together will add around 1,000 beds. 

Besides, the upcoming hospital in Chennai will add another 500 beds. It is also entering into the diagnostics segment in India.

However on the operating business side, the first half of FY20  performance has been below expectations with sales on consolidated basis totaling Rs 4115 crs from Rs 3611 crs in H1 last year but the PAT down to Rs 31,52 crs from Rs 172 crs in H1 last year. 

A major reason for this has been the sharp drop in income from foreign exchange fluctuation which totaled Rs 28 crs as compared to Rs 165 crs last year.

Also, Interest costs in H1 of FY20 have ballooned to Rs 176 crs from Rs 79.55 crs in H1 last year.

This was another key reason for the fall in profits. However, what is surprising is that receivables in H1 of FY20 have shot up to Rs 2138 crs accounting for 52% of sales which was Rs 2028 crs in FY19 accounting for 25% of sales.

Also considering that the company is in its growth phase, it incurred a CAPEX of Rs 567 crs last year and Rs 252 crs in H1 of FY20. 

Therefore despite having adequate liquidity for the current share buyback, we believe that it may require a significant amount of cash for its expansion plans going ahead

Also, shareholders have really not made significant wealth here considering the fact that the IPO price was Rs 190 and it is trading below this price for a long time. 

Hence going ahead the company’s stock will get rerated only if it improves its ROCE significantly which is currently between 10-12%.

Also since the buyback offer is very small its unlikely to enthuse investors positively in the short to medium term.  

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