Buy Healthcare Global Enterprises Ltd For Target Rs.199 - HDFC Securities
Healthcare Global Enterprises (HCG) is the largest provider of cancer care in India under the “HCG” brand. It owns and operates comprehensive cancer diagnosis and treatment services (through radiation therapy, medical oncology and surgery). Aggressive expansion in the last few years and cap on cancer drug margins have hit financials (lower margins/RoCE, high debt) and stock price has corrected around 50% from its all-time high. Having doubled bed capacity over the last five years, we expect HCG’s capex phase to ease from FY21. Only two new centers to be opened in the next 12 months and that will keep capital expenditure in check. Large part of bed expansion is done and we expect incremental losses to be offset by earlier hospitals turning positive.
The long term story in private healthcare remains exciting, due to low penetration in the country and favourable change in demographics. For the near term, we remain positive on hospitals in the listed healthcare space on the back of strong traction in organized healthcare space, medical insurance, better occupancy, improving balance sheet and operating margin. In FY20, HCG launched oncology services in Bhavnagar, which has led to significant improvements in profitability. Further, multi-specialty center in Rajkot achieved break-even EBITDA in Q3FY20. In the past 36 months, HCG launched 7 new cancer care facilities across the country, reaching out to more cancer patients across metros as well as Tier-I & Tier-II cities.
The pressure on margins and RoCE due to losses in new hospitals, regulatory challenges and higher debt have led to the stock trading at a significant discount to its historical highs but we believe this should reverse as the business turns around. Its investment in other businesses such as Strand Lifesciences (Bioinformatics) also dragged down overall return ratios. We believe, valuations are factoring in most of the negatives and see meaningful re-rating once operating leverage benefits play out.
Valuations and Recommendations:
HCG, with its integrated, one-stop-solution and focused model, is well poised to capture the growing potential with a pan-India focus. Equity infusion by CVC Capital is positive and removes a major overhang of high leverage. Moderation in capex and improvement in return ratios are triggers which may lead to re-rating for the stock, we expect profitability to improve from FY22.
In the near term, profitability is likely to remain muted, due to lower occupancy, led by the lockdown and also some of new centers are in the ramp-up phase. We forecast 10% revenue and 15% EBITDA CAGR and 500bps RoCE expansion over FY20-23E. We believe the stock discounts most of the negatives at 12.7x FY22E EV/EBITDA and successful execution could drive earnings growth and significant re-rating. We feel investors can buy HCG at the LTP and add on dips to Rs 136-140 band (11.2x FY22E EV/EBITDA) for base case target of Rs 180 (14.5x FY22E EV/EBITDA) and bull case target of 198 (15.8x FY22E EV/EBITDA) over the next two quarters.
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