Sagility India IPO analysis

Sagility India IPO (initial public offering) will open for subscription on November 5, 2024 and close on November 7, 2024. Below is a breakdown of the healthcare service provider's strengths, weaknesses and growth prospects to help investors make an informed decision.

Sagility India IPO in a nutshell

• Quality: Between FY22 and FY24, Sagility India reported an average three-year ROE and ROCE of 2 per cent and 3 per cent, respectively.
  
• Growth: During FY22-24, its revenue and net profit grew nearly 127 and 590 per cent per annum, respectively.
  
• Valuation: Post the IPO, the stock will be valued at a P/E and P/B of 67.5 and 1.9 times, respectively.
  
• Overview: Sagility India serves US health insurance companies and healthcare providers (hospitals, physicians and medical device companies). The US had the highest per capita healthcare expenditure among leading economies at over Rs 10 lakh in 2022. The company will benefit from the growth in the US healthcare market, driven by an ageing population and increasing prevalence of chronic diseases.

About Sagility India

Incorporated in 2021, Sagility India is an IT company operating in the US healthcare segment. With operations spanning 31 branches across five countries, its services to insurance companies include claims management, enrollment, benefits plan building, premium billing and clinical functions. It provides revenue cycle management functions to hospitals. As of FY24, it derives nearly 90 per cent of its revenue from the health insurance companies (payers). Within the healthcare operations outsourced market, the company has a share of approximately 1.18 per cent.

Strengths of Sagility India

• High client stickiness: Sagility India has retained over 90 per cent of its clients during FY23 and FY24. The company also increased its revenue from these retained clients by 10 per cent in FY24.

Weaknesses of Sagility India

• High competition: The healthcare services industry is highly competitive. Sagility India competes with big brands like Accenture, Cognizant, EXL, CorroHealth, Shearwater Health and Omega Healthcare. Increased competition may lead to pricing pressures and loss of potential clients.
  
• Dependency on US market: Sagility India earns all of its revenues from clients operating in the US healthcare industry. A decline in the growth of the US healthcare industry or a reduction in outsourcing by US payers and providers will significantly impact the company.

Risk report

Company and business

• Did Sagility India report earnings before tax of Rs 50 crore or more in the last 12 months?
  Yes. The company reported a profit before tax of Rs 242 crore in FY24.
  
• Will the company be able to scale up its business?
  Yes. Healthcare accounts for 17 per cent of the nominal GDP of the US, presenting a large market opportunity.
  
• Does the company have recognisable brands with client stickiness?
  Yes. It has established long-term relationships with top-tier clients, including five of the top 10 US health insurance players. As of FY24, the company maintains an average tenure of 17 years with its five largest client groups.
  
• Does the company have a credible moat?
  No. Several companies operate in the healthcare BPO and technology-enabled healthcare services sector.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, the promoters will retain an 85 per cent stake in the company.
  
• Do the top three managers have more than 15 years of combined leadership at Sagility India?
  No. The company was incorporated in July 2021, with Chairman and Managing Director Ramesh Gopalan joining in January 2022.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Sagility India free of promoter pledging of its shares?
  Yes. The promoters have not pledged any of their shares.

Financials

• 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. It has a three-year average ROE and ROCE of 2 per cent and 3 per cent. In FY24, it reported an ROE and ROCE of 3.6 per cent and 4.4 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. It reported a negative cash flow from operations in FY22.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of Q1FY25, the company's net debt-to-equity ratio stood at 0.15.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  Yes. The company operates in the service industry and doesn't require huge working capital for day-to-day affairs.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. Sagility India is profitable with positive free cash flow during FY23-24. Moreover, the company is not capex-heavy, so it is unlikely to need external funding in the future.
  
• Is the company free from meaningful contingent liabilities?
  Yes. The company had no contingent liabilities as of Q1FY25.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. Sagility India's stock offers an operating earnings yield of 2.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  There are no listed peers who operate in the same domain. The stock is valued at a P/E of 67.5 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  There are no listed peers who operate in the same domain. The stock is valued at a P/B of 1.9 times.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before investing.

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