Published on 12/02/2018 3:31:07 PM | Source: SPA Securities Ltd

Subscribe On - Aster DM Healthcare Ltd - SPA Sec

Aster DM Healthcare is one of the largest private healthcare service providers which operate in multiple GCC states based on numbers of hospitals and clinics and an emerging healthcare player in India. The company has a diversified portfolio of healthcare facilities, consisting of 9 hospitals, 90 clinics and 206 retail pharmacies in the GCC states, 10 multi-specialty hospitals and 7 clinics in India, and 1 clinic in the Philippines as of September 30, 2017. The company's total revenues from operations were INR 59.3 billion for FY17, while Adjusted EBITDA was INR 3,642.4 million for FY17.

Investment Rationale

Long standing presence across GCC states and India with strong brand equity

The company is well placed to capitalise on the expected growth in healthcare sector in the GCC states due to an early mover advantage, strong brand presence using a targeted strategy of offering different brands to cater to diverse group of customers and existing track record. Further, the presence of the company's pharmacies at multiple locations across various GCC states also enhances the visibility of its brands.

diversified portfolio of service offerings to leverage multiple market opportunities

The company provides healthcare services in the United Arab Emirates, Oman, Saudi Arabia, Qatar, Kuwait and Bahrain, which comprise all of the GCC states, in Jordan (which is classified as part of its GCC operations) and in the Indian cities of Kochi, Kolhapur, Kozhikode, Kottakkal, Bengaluru, Vijayawada, Guntur, Wayanad and Hyderabad. Its clinic in Manila, Philippines commenced operations in August 2015. The company's GCC operations encompass all levels of healthcare services from primary to tertiary services. In addition to providing core medical, surgical and emergency services, it also offers advanced surgical treatments in various specialties, including cardiology, oncology, radiology, neurosciences, paediatrics, gastroenterology, orthopaedics and critical care services.

Increase presence by way of Greenfield Expansion and inorganic growth

The company has 9 hospitals in the GCC states, with a total capacity of 867 beds, as of September 30, 2017. The company intends to capitalise on the increasing demand for healthcare services in the GCC states by building or expanding 4 multi-specialty hospitals in the UAE, for a total additional capacity of 286 beds. These hospitals are in the process of construction and are expected to be completed within the next 1 to 2 years. It also plans to build or expand 5 hospitals in India within the next 4 years to add 1,372 beds to its total bed capacity, with a focus on building and expanding facilities in Tier I and II cities such as Bengaluru, Trivandrum, Kannur and Kozhikode. In the past the company has successfully used acquisitions and strategic partnerships to expand its operations and consolidate its presence in new markets. Since its incorporation, it has acquired 8 hospitals in India and management rights in Aster CMI Hospital and DM WIMS Hospital, as well as 1 hospital, 1 clinic and 39 retail pharmacies in the GCC states.

Outlook and Valuation

Aster DM Healthcare is one of its kind complete healthcare provider, which caters to patients through hospitals, clinics and pharmacy stores, which are vertically and horizontally integrated. Over the past two years the company has incurred a capex of ~INR 8700 million with which the company plans to expand its presence in GCC (with 4 hospitals and 355 beds) and India (with 5 hospitals and 1300 beds).

The revenue from this capex is expected to be recognised in next two years. With stable growth in the GCC, the company plans to increase its contribution to revenues from India from ~19% to ~35% in 3-5 years (with expansion in Tier 1 and Tier 2 cities). With definite expansion plans through organic and inorganic growth opportunities and a limited timeframe for EBITDA breakeven (less than 12 months for hospitals, 18-24 months for clinics), the company is well poised for growth through expansion going ahead.

The company's revenues grew at a CAGR 23.7% to INR 59.3 billion in FY17. PAT for FY17 was at INR 2670 million with EBITDA Margins of 6.5%. We expect the company revenues to continue to grow at similar level with EBITDA margins growing back to ~13% by FY20E. Domestic hospitals trade at TTM EV/Sales of 2.5x - 3.0x. The company is trading at a FY17 EV/Sales of 1.9x. We recommend SUBSCRIBE to the issue from a long term perspective.

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