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Affordable healthcare with premium facilities...

Narayana Health Ltd (NH) is a chain of multi-specialty hospitals operating in India and the Cayman Islands.

* NH operates 47 healthcare facilities including hospitals, clinics and heart centres with 6,656 capacity beds and 30+ specialities.

* The company has a strong track record of providing quality healthcare services at an affordable cost.

* Over the last 5 years, NH has focused on increasing its presence at tier-1 cities by setting up premium multispecialty hospitals in New Delhi, Gurugram and Mumbai.

* We expect revenue to grow at a CAGR of 21% over FY21-FY23E and EBITDA margin to expand to 14.5% in FY23E as share of revenues from new hospitals and Cayman Islands increase.

* We initiate coverage on Narayana Health with a BUY rating based on 20x FY23E EV/EBITDA with a target price of Rs.517.

Focus on quality, affordable healthcare

Narayana Health (NH) has a strong track record of providing quality healthcare services at an affordable cost, especially in the field of cardiology. Unlike most private hospitals, NH allocates 60% of its bed capacity to general wards, which enables the company to provide services at lower costs compared to other private hospitals. The remaining bed capacity is catered toward high-income patients which allows NH to maintain operating efficiency.

“Asset-right” model

In the “Asset-Right” model, NH does not invest in the land or the hospital buildings, but invests in the medical equipment and manages the running of the hospitals. The company ties up with like-minded charitable organizations, government bodies and non profit organizations to set up these hospitals. Through this capital-light model, NH has added over 500 beds in the last five years while expanding ROCE from 7.5% in FY16 to 10.6% in FY20 and maintaining a Debt/Equity ratio of only 0.5x in FY20.

International operations

Narayana owns and operates Health City Cayman Islands (HCCI), which is a 110-bed facility located in the Cayman Islands, Caribbean. The Cayman Islands facility contributes around 19% of the NH’s total revenues. Cayman Island’s close proximity to the west coast of the U.S has attracted patients from cities like Miami with the cost of procedures at HCCI at around 25%- 40% of U.S prices. All the Doctors at HCCI are recruited from India and sent to the Cayman Islands.

Focus on tier 1 cities to improve margins

Over the last 5 years, NH has focused on increasing its presence in tier 1 cities by setting up premium multispecialty hospitals in New Delhi, Gurugram and Mumbai. In FY20, the new hospitals had an average revenue per operating bed (ARPOB) of Rs.1.2cr compared to Rs.94 Lakhs in other mature hospitals, indicating the premium nature of these facilities.

Valuations

Although the Covid-led lockdown has impacted operating performance in FY21, we expect a turnaround in performance from H2FY21 onwards as patient footfalls improve post the easing of lockdown restrictions in various cities. We expect revenues to grow at a CAGR of 21% over FY21-FY23E and EBITDA margins to expand to 14.5% in FY23E as the share of revenues from new hospitals and the Cayman Islands increase. NH’s strong track record of providing affordable world-class medical care will enable the company to maintain its performance at mature centres. We initiate coverage on Narayana Health with a BUY rating based on 20x FY23E EV/EBITDA with a target price of Rs.517.

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