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Second wave impacts GCC, India back to near normal

Q3 revenues stayed flat QoQ at | 2259 crore (still down 2.7% YoY) vs. | 2268 crore in the last quarter. India revenues grew 10.8% QoQ (up 6.7% YoY) to | 460 crore. However, GCC revenues de-grew 3.4% QoQ (down 4.6% YoY) to | 1866 crore. EBITDA margins expanded 257 bps QoQ to 14.5% due to lower other expenditure. Subsequent EBITDA grew 21.0% QoQ to | 328 crore. PAT came in at | 92 crore, which is ~2.8x of last quarter.

Strong RoCE in GCC despite aggressive expansion

Aster derives ~81% of revenues from GCC countries. In the last six years, it expanded its hospitals, clinics, pharmacy count by ~2x. However, despite aggressive expansion, RoCE stayed healthy [hospitals- 12% (established hospitals- 25%), clinics- 21% and pharmacies- 44%] due to 1) asset light model, 2) integrated business model, 3) faster occupancy owing to strong brand equity, 4) healthy ARPOB and 5) targeted strategy. We believe RoCE would improve further due to continuing improvement in occupancy, operational leverage at new assets. Despite disturbances due to second Covid-19 wave, overall GCC region has done fairly well in the crisis, auguring well for healthcare players like Aster to return to normalcy in due course.

Expanding presence in India

Notwithstanding being a late entrant, Aster has a network of ~13 hospitals and nine clinics, mainly in Tier-II, Tier-III cities in India. The company is now looking to expand its network in metros and Tier-I cities, which is likely to improve its overall ARPOB. However, due to continuous expansion and few specific unforeseen issues, the RoCE in India is just 3%, which is dragging its overall RoCE. To improve return ratios, the company is focusing on an assets light model for future expansion.

Valuation & Outlook

Despite the pandemic having created unforeseen hurdles, Aster continues to sequentially improve on the profitability front. While GCC operations are once again seeing a second Covid wave impact in UAE, India revenues are already back on the growth track amid waning Covid impact. Aster owns a unique business model among Indian healthcare services providers with strong established presence in GCC and India. While the India expansion remains on investment curve, firm footing and FCF generation from the GCC set-up is keeping the entire scheme of things under control, especially when the company is pursuing aggressive expansion mode in both GCC and India albeit via assets light model. Despite the capex cycle getting pushed further due to the pandemic, we are positive on Aster’s integrated business model and expect gradual margins and RoCE improvement on the back of higher occupancy and capacity optimisation in new assets from FY22E onwards. At current levels, we envisage favourable risk-reward matrix and maintain BUY rating with a target price of | 210 on SOTP basis (vs. earlier | 170).

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