SAHRUDAYA HEALTH

CARE PVT. LTD. :

TOWARDS A TERM SHEET
PE Investing firms

Name Roll Number

Aakash Singh BJ22162
Dyuwan Shukla BJ22172
Ejya Singh Sharma BJ22173
Madhulika Singh Gour BJ22179
SUMMARY
The case is about a company, SAHRUDAYA HEALTH CARE PVT. LTD. (SHPL), which is facing
several doubts regarding their plan to dilute their equity holdings and raise capital. The
company is in talks with a potential investor, Medicover, but they have several questions
that remain unanswered such as: how much equity and control they are willing to give up to
Medicover, what percentage of equity Medicover will seek, the terms and conditions of the
deal, Medicover's valuation of SHPL, the amount Medicover will invest, board control, and
whether Medicover will pay in tranches or make a one-time payment.

Dr. Anil, a person involved in the process, acknowledges that successful fundraising requires
not only careful financial analysis but also good negotiation skills. SHPL has a lot of work to
do and limited time to prepare for the negotiations.

Market Landscape
Healthcare in India is a significant sector, with a market value of around $100 billion in 2017,
and a predicted growth rate of 22.9% to reach $280 billion by 2020. The Indian healthcare
market is divided into six segments: hospitals, pharmaceuticals, diagnostics, medical
equipment and supplies, medical insurance, and telemedicine. The healthcare delivery
system accounts for 65% of the market and includes government and private hospitals,
diagnostic centers, nursing homes, and pharmaceuticals. The healthcare sector in India also
has a cost advantage, attracting patients from all over the world, and a favorable investment
environment for foreign healthcare companies. The medical tourism industry was valued at
$3 billion in 2017, with a prediction to reach $6 billion the following year. The Indian
healthcare industry has attracted FDI worth IN275.7 billion from April 2000 to September
2016.

About the Investors – Samara Capital and Medicover

Samara Capital and Medicover are investment firms in the healthcare industry. Samara
Capital, a private equity firm based in India, has a focus on investing in fast-growing
companies, with a typical investment size of USD 15 million to USD 100 million, and seeks to
take a board seat in portfolio companies. The firm conducted due diligence on a South
Indian hospital chain, SHPL, and was impressed with its fast growth and expertise in
cardiology, orthopedics, neurology, and gynecology. Samara's due diligence showed that
SHPL's management was young and qualified, its revenues had grown 83% from 2014 to
2016, and its hospitals were equipped with state-of-the-art technology. Medicover, a
multinational healthcare and diagnostic services provider, was brought into the decision-
making process. The firm, which provides comprehensive healthcare services through a
large network of specialty care facilities, hospitals, clinics, and laboratories, was founded by
Swedish entrepreneur Bent Beckmann and investors in Poland in 1995. Before investing in
SHPL, Medicover retained Deloitte for financial due diligence and EL° for legal due diligence.

Company Background - SHPL

Sahrudaya Healthcare Private Limited (SHPL) was founded in 2010 by Dr. Anil Krishna, Dr.
Sharat Reddy, Dr. Krishna Prasad, and Hari Krishna. The company started as a cardiac center
and later expanded into a multi-specialty hospital, opening a new 200-bed cardiac center

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 and a 300-bed hospital in Madhapur. After some tension in the partnership with Sarvejana,
SHPL took complete control and ownership of Madhapur Multi Specialty Hospital in 2015.
The company experienced growth and success, reaching break-even within three months of
opening their new hospital. They recently had a meeting with Samara Capital and
Medicover, which resulted in a proposal for a strategic investment in SHPL by Medicover.
Dr. Anil and Hari need to consider the proposal before making a decision.

LIST OF ISSUES IDENTIFIED

The major problems faced by SHPL in the text are:

1. The Capital Problem

Need for capital: SHPL has decided to dilute their equity holdings and raise capital, but
they are uncertain about how much equity and control they are willing to give up.

2. Identifying the terms of the deal

Negotiating the terms and conditions of the deal: SHPL is unsure about the percentage
of equity that Medicover will seek, the terms and conditions of the deal, and the
valuation of SHPL by Medicover.

3. Identifying the investment amount

Determining the investment amount: SHPL does not know how much Medicover will
invest, and whether it will be in tranches or a one-time payment.

4. Board Control Situation

Board control: SHPL is also unsure about the board control after the deal with
Medicover.

5. Shortage of time on account of limited period offer

Time constraints: Dr. Anil acknowledges that SHPL has a lot of work to do and very little
time to prepare for the negotiation and financial analysis.

EVALUATING OUR OPTIONS AND

ALTERNATIVES
Using the exhibit data on the competitors, we identify the ratio of Pat to the equity
  Narayana H NG Apollo Fortis KIMS Sarvajen Continenta Yashod
Industries Malar a l a
PAT 567.7 15.31 3339.5 67.29 -2.79 67.05 -391.57 657.3
Equity Paid Up 2043.61 33.51 695.63 186.21 212.48 239.36 1393.83 182.98
PAT/Equity 0.27779 0.45688 4.8006 0.36137 - 0.28012 -0.28093 3.59220
Paid Up 8 0.01313

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It is evident from the table that the top 3-4 players have the PAT/Equity paid up ratio in the
range of 0.278-0.45688. Therefore a desirable value for SHPL can be taken as near 0.359 by
FY 20 (the last year of projections)

SHPL
FY 16 FY 17 FY 18 FY 19 FY 20
Revenue 1654.66 2977 4104 4534.2 4919.9
Total Income 1663.13 2979.5 4107.7 4538.7 4926.8
Total Expenses 1801.6 3035.2 3865.4 4077.9 4278

PBT 8.9 -55.7 242.3 460.8 648.8

PAT -65.46 -70.2 157.9 304.6 428.9

Equity Paidup 188.28 188.28 188.28 188.28 188.28

PAT/Equity Paid Up -0.347673678 - 0.838645 1.617803 2.27799
0.37285

Equity Paid Up after Raise Sector 0.349

PAT/Equity
Equity Paid Up after 188.28 1183.28 1183.28 1183.28 1183.28
Raise
PAT/Equity -0.347673678 - 0.133443 0.25742 0.362467
0.05933

Min Raise
995
Max Raise 6,633
Actual Raised 995

(USD to INR on 31 March 2016 is taken as 66.39)

From this we find that by raising 15 million USD at a conversion rate of 66.39 to INR, a value
of 995 million INR can be raised to reach a PAT/Equity of 0.3624 in FY 20.

If we target precisely 0.359, then

Equity Paid Up after Raise Sector 0.349
PAT/Equit
y
Equity Paid Up after 188.28 1228.94 1228.94 1228.94 1228.94
Raise
PAT/Equity -0.347673678 - 0.128485 0.247856 0.349
0.05712

Min Raise
995
Max Raise 6,633

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 Actual Raised 1040.659828

This comes out to about 15.67 million USD, which is keeping in mind that Samara Capital
makes investments between 15 to 100 million USD.
We can also find out the cost of equity raise for SHPL, starting with the sectoral beta from
exhibit 10’s information

Calculation of Sector Beta

Beta Net Worth (INR
Million)
Narayana 0.34 9606
Apollo 0.35 34301
Indaprastha 0.97
Fortis 0.75 955
NG 0.33 144.58
KMC 0.77

Sector (Weighted 0.356289

Average)

Cost of Equity Calculation

Risk Free Rate 6.81
Sector Beta 0.35628
9
Expected Return 9.4
Levered Beta 1.48996
7
Cost of Equity 10.6690
1
Cost of Debt 11.35
Tax Rate 0.35
Tax Adjusted Cost of 7.3775
Debt

Equity (Total) 567

Debt (Total) 2775.6
Total 3342.6
D/E 4.89523
8
Weight of equity 0.16962
8
Weight of debt 0.83037
2

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RECOMMENDATIONS
To tackle the questions asked in the case, the following steps could be taken:

1. Determine the company's goals and priorities: before entering into negotiations, it
is important to determine what SHPL wants to achieve through the fundraising effort
and what is the most important for the company (e.g. retaining control, minimizing
dilution, maximizing investment).

2. Assess the market: understanding the market conditions and the state of the
industry can help SHPL determine what type of deal would be reasonable to expect
and what terms would be typical for a similar transaction.

3. Conduct due diligence: this includes both financial analysis (e.g. evaluating SHPL's
financial performance, projections, and risks) and negotiating analysis (e.g.
understanding medicover's priorities, risk tolerance, and negotiating style).

4. Determine an appropriate valuation: SHPL will need to determine an appropriate

valuation for the company and be prepared to justify it to potential investors. this
could be done through various methods such as a discounted cash flow analysis,
comparable company analysis, or precedent transaction analysis.

5. Negotiate the terms of the deal: based on the information gathered through the
steps above, SHPL should be prepared to negotiate the terms of the deal with
Medicover, including the percentage of equity to be sold, the terms and conditions
of the investment, the structure of the investment (e.g. tranches or one-time
payment), and board control.

6. Close the deal: Once a mutually acceptable agreement is reached, the deal can be
closed, and the investment can be made.