NEW DELHI - Investors betting on surging health care demand have enthusiastically lapped up initial public offerings in India worth a total of $296m, from drug maker Alkem Laboratories Ltd. and leading domestic diagnostic chain Dr. Lal PathLabs Ltd as the country’s IPO market records its best year since 2010.

The robust showing by the two companies comes as affordable Bangalore-based healthcare provider Narayana Hrudayalaya Ltd, established in 2000 by philanthropist and cardiac surgeon Devi Prasad Shetty, who was the personal physician of Mother Teresa toward the end of her life, gears up for its IPO this week in which it aims to raise between INR6.01bn and INR6.13bn ($89.5-91.0m) from investors.

Institutional and retail investors seeking shares in Alkem and Dr. Lal Pathlabs, whose IPOs closed late last week, were counting on an ever-increasing call for healthcare services in the country of 1.25 billion people amid a rising burden of non-communicable and communicable diseases. They shrugged off troubles roiling some other players in the country’s medical sector over US and other international regulatory compliance issues.

The IPO by Alkem, the country’s fifth-largest drug manufacturer by domestic sales, was subscribed more than 44 times while Dr Lal Path’s offer was subscribed over 33 times, according to stock exchange figures on Dec. 11. Alkem’s IPO aims to raise INR13.5bn and Dr. Lal PathLabs’ around INR6.4bn.

The subscription success of the two healthcare IPOs, worth a total of INR19.9bn, comes as the first-time Indian share sale market records its strongest performance in five years.

Investor confidence has been buoyed by the pro-business policies of the right-wing government of Prime Minister Narendra Modi as he seeks to attract overseas funds and drive economic growth higher.

Both share issues, which had received an enthusiastic “thumbs up” from local analysts as strong local brand names with established offerings, were oversubscribed on day two of the three-day public offers.

Strong Appetite For Alkem

With the latest issues, the total amount expected to be raised by Indian IPOs this year will cross INR140bn, the biggest sum since 2010 when companies raised INR375bn. In 2014, IPOs raised just INR12.61bn.

The investor appetite for Alkem, which has filed 66 ANDAs of which 18 have received final approval and two have tentative approvals, smartly outstripped the welcome for Biocon Ltd.’s contract research division Syngene International Pvt. Ltd., which was more than 32 times subscribed. Syngene’s shares have gone on to gain 45% since they started trading on Aug. 11.

Alkem, which fixed its price band at INR1,020-1,050 per share, produces branded generics, generic drugs, active pharmaceutical ingredients (APIs) and nutraceuticals, has 14 manufacturing facilities in India and two in the US and R&D facilities in both countries.

Dr. LalPath, which fixed its price band at INR540-550 per share, has some 172 clinical labs, more than 1,550 patient service centers and nearly 7,060 pickup points.

Alkem’s appeal was enhanced by its strong profitability - for the first half of the fiscal year it reported profit of INR4.5bn, just a shade under the INR4.6bn it posted for the full previous financial year, analysts said.

Alkem's IPO was an offer for sale by the founder group and no primary capital was being raised. Analysts said the issue was reasonably priced and at the upper end of its price band it would trade at 27 time full-year earnings, around a 15-20% discount to its peers.

Domestic Strength

Mumbai-based Alkem’s attraction to investors was further boosted by the fact that almost three-quarters of its sales come from the Indian market, although it plans to double its US revenue contribution over the next five years (the US currently contributes a quarter of overall revenue).

The strong domestic presence is seen as protecting Alkem from the difficulties affecting some other local drug makers, which mainly sell to the US where the Food and Drug Administration has stepped up monitoring of testing, hygiene and other manufacturing procedures at companies’ Indian plants.

The financial performances of top Indian firms such as Sun Pharmaceutical Industries Ltd. and Dr. Reddy's Laboratories Ltd. have been hit by manufacturing compliance issues raised by the FDA.

Alkem’s India business “is a steady cash cow at 17-18% growth adding financial muscle to the company,” India’s Reliance Securities said in a recent note to investors.

Gurgaon-based Dr. Lal PathLabs, which has a pan-India presence, reported a net profit of INR879.7m on revenues of INR6.4bn for the financial year to March 2015. Like Alkem, Dr. LalPath was not raising any primary capital for its business.

India’s ICICI Securities said that the company was “well positioned to take advantage of the growth of the Indian diagnostic services industry.”

Meanwhile, Indian cancer care network HealthCare Global Enterprises Ltd is expected to launch an IPO in January, according to local media reports.

Narayana Attractions, Plans

The upcoming offer by Narayana Hrudayalaya, which aggressively pursues economies of scale to cut costs for patients, will mark the third healthcare provider to tap Indian equity markets this month. Narayana Hrudayalaya's public share offer represents a 14.04% stake in the company, which has a particularly strong presence in the southern state of Karnataka and in eastern India and a growing presence in central and western India.

The offer is slated to open on Dec. 17 and will close on Dec. 21.

At Shetty’s flagship heart hospital in Bangalore, doctors perform around 30 heart operations a day. While the chain keeps a firm eye on making a profit as vital to expanding its mission to provide affordable health care, it treats the poorest patients for free.

The majority of Indians pay out-of-pocket for their healthcare because they lack proper insurance or have no insurance and the cost of medical care drives some 55 million Indians annually into poverty, according to the Public Health Foundation of India.

Narayana Hrudayalaya runs 23 multi-specialty and super-specialty hospitals, eight heart centers and 25 primary care centers in 32 cities treating cardiac complaints, cancer, gastrointestinal, kidney and other problems.

Shetty, 62, along with his wife are majority shareholders in the company, while JP Morgan and the UK’s CDC Group, the world’s oldest development finance institution, also hold stakes. Shares will be offloaded by JP Morgan and the Shetty family among others, according to the prospectus. All proceeds will go to the selling shareholders and the company will not receive any proceeds.

Extending Reach

Even so, the surgeon says the IPO will allow the company to heighten its brand visibility and extend its patient reach. "We will be much better off now. Affordable healthcare requires a huge capital requirement. We have to add a number of beds, thousands and thousands of bed. That cannot be organized as a privately held company,” Shetty, who’s frequently photographed in his surgical scrubs, told India’s CNBC-TV18 ahead of Thursday’s IPO launch.

"Those additional number of surgeries will happen when more people access healthcare, then the cost of offering that service will be much less," he said. Shetty’s business plan is based on the belief that through high patient volume, centralized buying and no-frills care he can provide low-cost services to India’s “aam aadmi” or common man.

For the year ended March 2015, the company, which served nearly two million patients in the 12 months, had EBITDA - earnings before interest, taxes, depreciation and amortization - of INR1.37bn but the company posted a net consolidated loss of INR108m.

While the company's revenues rose 25% last year, its EBITDA slipped by 4%. The company recorded a net profit of INR317m in the previous year. Last year's losses were from units not fully under its control, according to the prospectus.

Shetty’s son and senior company vice-president, Viren, was quoted by India’s The Economic Times newspaper in September as saying that the hospital aims to continue having a social impact after the IPO and has never been held back by having for-profit investors in the past. “Investors, private or public, know what we stand for when they put their money in it,” Viren Shetty told the newspaper.

Last week, Narayana Hrudayalaya - roughly translated as "temple of the heart" - fixed the price band for its issue at between INR245 and INR250.

Eager Investors Snap Up Indian IPOs On Positive Health Care Outlook

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