Value investing in Shalby


Why Shalby

  • There are many hospitals with huge infrastructure and high market value than shalby, in India (e.g. Apollo Hospitals Enterprise Ltd Fortis Healthcare Ltd, Narayana Health, etc.)
  • But “Why Shalby” …. there is a specific reason for selecting shalby for our valuation, as seen inValuation – An Overviewone of the purposes of the valuation is for the investment. That investment can be classified as short term and long-term investment. When we look into long term investment options, companies in their early growth cycle are preferred. We see “Shalby” as one among the hospital stocks which business suits such category.
  • We derive comfort on Shallby’s growth trajectory based on information available in public media on its plans of growth, area of investment for expansion and strategies for growth indicating expectations of faster than other hospitals in market.

Accordingly, the motive of investment for long term for value investing and the growth strategy of the Shalby made us to choose that hospital for this valuation exercise. The valuation view on shalby is independent of the company and any research agencies.

About Shalby

Shalby Hospitals (Shalby Limited), established by Dr. Vikram I. Shah in 1994 in Ahmadabad, Gujarat, operates a chain of multispecialty hospitals across India, holding an aggregate bed capacity of ~ 2000 hospital beds.

Innovative strategy for expansion

Besides owning and operating multispecialty hospitals, they also operate and expand business through the following models:

  • Operate and Manage (Revenue sharing model)
  • Hospital Management Contracts
  • Outpatient clinics

Which Method of valuation

As seen previously in “Valuation – An Overview” there are many methods of valuation and each method has their own advantage and challenges. Methods vary case to case based on their respective characteristics.

Also, the data availability of the industry will influence the valuation methodology. The type of industry we are dealing with is service industry, So I believe Income based approach (DCF) and Market comparable method shall hold better for valuation based on following:

  • The income-based approach determines the value of a business based on its income potential. It looks at cash flow, and does not place value on the fixed assets of the business. This valuation method is best suited for solid cash-generating businesses (i.e. businesses that are not asset intensive, Shalby strategy to be asset light for growth). The Discounted Cash Flow method is a subset of the income-based approach this method, which is based on estimating the current value of future cash flow, is appropriate for businesses which have forecasted steady cash flow over several years.
  • The market comparable approach values your business using the average of businesses in the same or similar industries.  However, this approach can be best suited only when there is a comparable stock while related data are reliable and relevant.

Asset based valuation was not adopted because we believe that the asset-based approach may not a meaningful, as it may not adequately take into consideration the intangible, going concern value of the business. For example, a services-based business with valuable long-term relationships may not be an asset rich balance sheet, in that the goodwill associated with the relationships may not be reflected on it. The relationships may be a key factor in the value of the business.

So, the DCF methodology and Market Comparable approach has been adopted here in valuing Shalby hospital business.

Valuation of Shalby


  • The company is having the current bed capacity of 2012 in 11 hospitals and it has been projected to grow to the bed capacity of 5856 in 32 hospitals. And all the beds will be operating in bed capacity of 70% (which is consider as max operating capacity in Overall market level) from the year 26-27 (terminal year). And income has been projected based on operating bed capacity of the hospital.
  • Working capital has been projected based on sales, Purchase and other expenses which is affecting Working capital. And Working Capital is also in line with market average working capital.
  • Capex has been invested in each year as it is the business where expansion need huge asset but Shalby is working on asset lite model of business by their innovative strategy for expansion and as per the information available in the website of the hospital nearly 1000 Crs investment has been proposed to be made for expansion for the period between 2019-20 and 2023-24.

Based on cash flow projected as detailed above, the following ratios has been arrived:

  • Since, the company is in growing stage it is generating ROI of 6% as on 31.3.2019 but based on the plans and projection the ROI can go up to 18% in future.
  • Sales to Capital ratio of 0.71 times as on 31.3.2019 but the company is still in the growing stage the company’s sales to Capital ratio is expected to reach 1.31 times once full capacity of these hospitals are availed.

Risk factors

  • Operational risk – One of the important risks for the hospital industry is Operational leverage as it need huge infrastructure and funding to start and operate hospital in India. Shalby management is considering following asset lite model of lease and operate to manage this Operational risk. They plan to link the lease outflow as a share of revenue, thus making is lighter on cash flows.
  • Financial risk – As Shalby is less leveraged company and showed its intentions to be a Zero Debt company in the near term, the profit flow to equity holders is not reduced by any cost of debt. This also allows room for leverage where ROI can be enhanced in due course if required.

Keeping the above-mentioned risks in consideration and other general market risks faced by hospital industry the risk premium of the company has been taken from respected market database (Country Default Spreads and Risk Premium by Pr. Aswath Damodaran) for the computation of Cost of equity in discounting the projected cash flow.

Terminal value is calculated based on Gordon Growth approach where respective factors considered for computation is mentioned below.

  • Terminal Growth rate has been considered as 5% as the company having Terminal year ROI of 18% and Terminal Reinvestment rate of 27%.
  • WACC has been computed as weighted average of Ke (Cost of Equity) and Kd (Cost of Debt). Where Ke has been computed based on CAPM model.

For arriving at the Future cash flows, considerations have been given on Information given in annual report of 18-19, the figures published by the company vide its Q1 Report of FY 2019-20 and other publicly available information about the company.


Valuation by the Discounted Cash Flow Method (Rs. In Million)

DCF Working

And the Value per share based on the valuation using Discounted cash flow method is below

DCF Base Price

And the Scenario has been added to define the price range of the equity share, here the Price range of the equity share has been arrived by adding and subtracting WACC by 1%.

DCF Senario price

Market Comparable based Valuation

The Market data available as on 30.09.2019 has been considered for the purpose of valuation. And Information regarding financial figure of Shalby the data available in the Annual report of 18-19 has been considered.

The Relative value arrived by multiplying Shalby EBITDA value with peers EBITDA multiples mean and median. Range has been arrived by taking the “mean” and “median” of the peers EBITDA multiples data available.

MC Prices

Valuation Summary

  • The equity value of the Company has been derived out of both the DCF and Earnings multiples methods and on each method different scenarios are also taken in consideration to arrive at the Value of the share.
  • Out of the various Values arrived out of the different scenarios the highest value is Rs.191 per share and which is arrived on the market Comparable method by using mean (Average) of EV/EBITDA of the peer companies.
  • And the lowest value arrived is Rs.120 per share under scenario of +1% WACC of Discounted Cash flow method and which turns out to be the nearest to the current market price (as on 31.10.2019) of Rs.107 per share.
  • Thus, based on the Valuation Shown above the fair market value of shalby may differ from Rs.120 – Rs.191 per share.


  • Based on information available and Assumptions made on both internal and external factors of the company for valuation, the share price range of “120 – 191 per share” has been arrived.
  • Markets receive information every moment and make an attempt to factor the financial effect of the information in the stock price. Individual estimates of the effect vary and as such different people may come up with different stock prices. Therefore, there can be a difference between the market value of a company and the value arrived based on any independent valuation because the information considered and its perception varies.
  • Equity valuation is an evolving/ongoing process as market receives and factors information as it is made available.
  • Since bottom up approach is considered here the potential of growth is limited by the current business plans. As things pan out better the plans will evolve and so the valuation. Do let me know of your thoughts on this.

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