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Strong domestic performance drives Q3

Aster DM Healthcare’s (Aster) Q3FY22 performance exceeded our estimates mainly due to better than expected growth in India hospitals. Consolidated revenues grew 18.9% YoY to Rs26.5bn (I-Sec: Rs25.0bn), which works out to a 2- year CAGR of 6.8%. EBITDA margin improved by 30bps YoY to 15.0% with occupancy recovery. We expect the overall business and margins to continue improving with higher occupancy and case mix. We believe the company’s strategy of asset-light expansion and an expanding margin trajectory (390bps over FY21-FY24E) would aid positive FCF generation. Aster is aggressively focusing on capacity addition in India. However, uncertainty about the restructuring plan, including demerger of India business, is likely to weigh on near-term performance. Downgrade to ADD (from Buy) with a target price of Rs211/share.

Business review: Revenues grew at a 2-year CAGR of 6.8% led by 3.5% growth in GCC hospitals and 20.3% in India hospitals. India growth was driven by rise in occupancy to 65% vs 61% YoY and increase in operational beds. Occupancy at GCC hospitals was up to 52% vs 51% QoQ and is expected to improve gradually with increasing footfalls. GCC Clinics business grew 8.3% on a 2-year CAGR basis amid continuous gaining traction from covid testing. Pharmacy business declined 1.2% on a 2-year CAGR basis due to lower footfalls (expected to improve in the coming quarters). EBITDA margin expanded 30bps YoY to 15%, in line with I-Sec estimates. Increase in India margins by 380bps YoY amid improvement in occupancy was partially offset by decline in GCC hospitals’ margins. We estimate EBITDA margins to remain at ~16% over FY22E-FY24E.

Key concall highlights: 1) Management expects India business contribution to increase to 40-50% in the next four years from 27% at present; 2) company is actively looking for a strategic partner for the GCC business; 3) reiterated Rs5.8bn of annual capex for the next 2-3 years, including ~Rs3bn annual capex for India; 4) India diagnostics: management expects 33 labs and 400 experience centres by FY23-end

Outlook: We expect Aster to report 14.8 / 25.7 / 91.1% revenue / EBITDA / PAT CAGRs respectively, over FY21-FY24E largely driven by the hospitals business. RoE / RoCE is expected to gradually improve to 19.2% / 12.4% by FY24E. It is looking to aggressively expand its bed capacity in India. Management highlighted it may consider separating GCC and India businesses in the near term to create shareholder value

Valuations: We raise our earnings estimates by ~4-5% each year for FY23E and FY24E mainly due to strong improvement in margins in domestic hospitals. However, we cut GCC and India hospitals’ multiples to capture the uncertainty about restructuring plan including demerger of the India business. Downgrade to ADD (from Buy) with an SoTP-based target price of Rs211/share. Key downside risks: regulatory hurdles, additional waves of covid in India, and delay in turnaround of new hospitals

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