Rainbow Children's Medicare IPO: How good is it?

In our previous part of Rainbow Children's Medicare IPO story, we read about the key details of the IPO along with important information about the specialty hospital chain. Here we will answer some questions about Rainbow Children's Medicare and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. The company's profit before tax was Rs 127 crore in the 12 months ended December 2021 period.

2) Will Rainbow Children's Medicare be able to scale up its business?
Yes. The company has opened four hospitals in the last three years and is planning to open more so that it can establish a proper hub and spoke model in all the places it operates in.

3) Does the company have recognisable brands truly valued by its customers?
Yes. Rainbow Children's Medicare is known as one of the best paediatric hospitals in India.

4) Does Rainbow Children's Medicare have high repeat customer usage?
Not applicable. The concept of returning customers should not be applied to healthcare.

5) Does the company have a credible moat?
No. Although Rainbow Children's Medicare is a specialist in paediatrics and obstetrics, there are other established players in the industry who provide similar services. Their specialty or brand recognition does not give a solid moat.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The hospital chain has adhered to all the regulations consistently over the years.

7) Is the business of the company immune to easy replication by new players?
Yes. While it may be easy to set up a hospital, gaining a reputation and becoming an industry leader is not easy for a new player.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. Medical treatment cannot be outdated or substituted.

9) Are the customers of the company devoid of significant bargaining power?
Yes. Since customers are individuals, they do not have significant bargaining power. This can be witnessed in its average revenue per day. From Rs 26,696 in FY19 to Rs 45,951, as of December 2021.

10) Are the suppliers of Rainbow Children's Medicare devoid of significant bargaining power?
No. Since the hospitals provided a niche and specialised service, they are required to hire the best doctors available and they have various options to choose and can negotiate their pay too.

11) Is the level of competition the company faces relatively low?
No. There is high competition in both the broader healthcare industry and paediatric market. It includes both listed and unlisted players.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about 43.7 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The Chairman and Managing Director, Dr Ramesh Kancharla (also a promoter) has been associated with Rainbow Children's Medicare since its incorporation in 1998.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.

16) Is the company's accounting policy stable?
Yes, the company's accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledge.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
No, Rainbow Children's Medicare managed to generate a three-year (FY19-21) average return on equity of 11.4 per cent and a return on capital employed of 12.8 per cent. For FY21, the company generated a return on equity of 8.8 per cent and a return on capital employed of 10.5 per cent.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.

20) Did Rainbow Children's Medicare increase its revenue by 10 per cent CAGR in the last three years?
No. Its revenues increased from Rs 542.8 crore in FY19 to Rs 650 crore in FY21 at a CAGR of 9.4 per cent.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes. The company's net debt-to-equity ratio stood at -0.21 (i.e., net cash) as of December 31, 2021, and its interest-coverage ratio stood at 4.48 as of December 2021 TTM.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company had a negative working capital cycle of 166 days in FY21. It doesn't require huge working capital.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company is well-capitalised. It has been doing well and has already surpassed its FY21 revenue, operating profit and net profit numbers in the nine months ended December 2021 period. Moreover, the IPO proceeds of Rs 280 crore would fund the company's capital expenditure (expansion of hospital network and purchase of medical equipment).

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
No. Short-term borrowings have increased more than 4.5 times from Rs 2.9 crore in FY19 to Rs 13.4 crore, as of December 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, Rainbow Children's Medicare is free from meaningful contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will only offer an operating-earnings yield of 3.6 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
No. Post-IPO, the company's stock will trade at a P/E of around 49.2, which is more than its peers' median P/E of 48.3.

28) Is the stock's price-to-book value less than its peers' average level?
No. Post-IPO, the company's stock will trade at a P/B of around 7.2, which is more than its peers' average P/B of 6.7.

Also, read our earlier story on Rainbow Children's Medicare IPO to learn about key IPO details and important company information.

Disclaimer: The author may be an applicant in this Initial Public Offering.