Margin growth hopes give hospital, pharma IPOs booster shot

Margin growth hopes give hospital, pharma IPOs booster shot

Filings by the hospitals as well as pharmaceutical spaces in 2023 for an initial public offering (IPO) have seen a surge, compared to a slow 2022.

IPOs totalling Rs 6,563 crore have been launched this calendar year so far, with those aggregating Rs 8,775 crore still in the pipeline. Of the total Rs 15,338 crore in 2023 — both launched and expected — Rs 6,087 crore is in the hospitals, diagnostics, and medical equipment spaces, while Rs 9,252 crore is in the pharma and drugs space.

There were two IPOs in 2022 — both in the hospitals/diagnostics space — raising Rs 3,786 crore. There were none in the pharma/drugs space.

“Pharma and API (active pharmaceutical ingredient) companies have typically grown with private equity funding, and the good companies throw up enough cash so as to not require primary capital, which is why the IPOs have almost all been ‘offers for sale’. Firms that are of a decent size or niche will have takers,” said Venkatraghavan S., managing director and head (equity capital markets), Equirus Capital.

Considering that 2022 wasn’t too great for IPOs, the Rs 3,786 crore raised that year was not that bad too, he pointed out.

In 2021, total of Rs 6,375 crore was raised from IPOs by hospitals, diagnostics services, and medical equipment suppliers. The figure was Rs 5,208 crore for pharmaceutical and drug manufacturers.

“Hospitals and diagnostics are capital-intensive businesses. India has, specifically post-Covid, seen the need for good hospitals and allied services, so there have been fundraisings on that count. Those that are profitable and with a viable business model for the long term will always find fancy among investors,” added Venkatraghavan.

This rising interest begs the question: what has given the booster shot to the sector?

Experts say developments have been positive from across the spectrum. While diagnostics services providers are doing well, a good showing by the pharma index has also lifted spirits.

“Good news across the sector, especially a strong showing by the listed pharma stocks, has led to expectations of higher growth for FY24. For hospitals, much of the capex seems to be over, which likely means margin growth next year,” said Pranjal Srivastava, partner (investment banking), Centrum Capital.

He added that pharma funds keep looking for new ideas and fresh investment avenues, which has also led to interest in the counter and stronger prospects.

The Nifty Pharma index has gained 19.43% in the last one year, while the Nifty Healthcare has returned 19.06% during the same period.

While 2022 was a disappointing year for IPOs, one could have expected the hospitals and pharma spaces to have thrived, given that the country was yet to recover from the aftermath of Covid.

“Much of 2022 was spent in preparation for the IPOs. The preparation time is 7-9 months, which leads to a lag between performance and filing of the DRHPs. Further, filings take a backseat when market sentiment is low, so a revival in sentiment in 2023 has led to more companies planning to list,” Srivastava pointed out.

Srivastava said the outlook for next year is quite healthy, given the number of DRHP filings seen. Mankind Pharma’s Rs 4,326-crore IPO in April this year was the largest in the space this year.