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Growth momentum to continue

HealthCare Global Enterprises’ (HCG) Q4FY21 performance was broadly inline with our estimates driven by continued sequential recovery in the oncology hospital segment revenues that grew 8.8% QoQ. However, higher than expected costs suppressed EBITDA margin to 13.2% (I-Sec: 14.5%). We expect the recovery trend to continue and normalcy to be achieved by H2FY22E. Recent capital infusion has removed the key overhang of high leverage with repayment of debt from the fund raising exercise. We remain positive on the stock as the company is poised to grow positively hereon and strengthening of balance sheet with no major capex plan in near term. However, recent run up in the stock has limited the upside potential, hence we downgrade to ADD from Buy with a revised target price of Rs206/share.

Growth momentum in revenue continues:

Consolidated revenues grew 10.2% with improving momentum in the hospital business. Oncology revenues grew 11.7% YoY and 8.8% QoQ with higher AROPB (+6.0% YoY). While, Milann (infertility) segment revenues declined 12.4% YoY, it also improved QoQ by reporting growth of 7.6%. Karnataka cluster grew 11.1%. Gujarat cluster grew 4.7%. Maharashtra cluster grew 37.3% YoY. We expect this growth momentum to continue for the coming quarters with ongoing vaccinations and receding 2nd wave of the pandemic. We believe Gujarat and Maharashtra clusters would be the key growth drivers over FY21-FY23E. East India cluster witnessed growth of 11.7% YoY.

Margin set to normalise with improving performance:

EBITDA margin dropped 10bps YoY and 60bps QoQ to 13.2% with 210bps drop in the gross margin. Effective cost control on personnel and S,G&A fronts helped offset the decline of gross margin to some extent. We expect EBITDA margin to normalise by H1FY22 with positive revenue growth and estimate 460bps improvement over FY21-FY23E.

Outlook:

Over all we expect 20.5% revenue and 39.6% EBITDA CAGR over FY21- FY23 on a COVID-19 impacted FY21 base. Capex phase is complete and no new projects are planned in the near term. We expect losses from new centres to narrow improving overall profitability. The recent fund raise has helped in paring down the leverage significantly, with net debt dropping to below Rs3bn.

Valuations and risks:

We broadly maintain our estimates and remain positive on the stock considering focus on niche oncology healthcare services and potential to grow faster with strengthening of balance sheet post the recent fund raise. Considering recent run up in stock price, we downgrade the stock to ADD from Buy with a revised target of Rs206/share based on 16xFY23E EBITDA (earlier: Rs192/share). We have raised the target multiple to 16x from 15x considering improving business performance and strengthening balance sheet. Key downside risks: Higher competition in oncology, and delay in operational turnaround of new centres.

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