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Strong growth recovery

HealthCare Global Enterprises’ (HCG) Q1FY22 performance was better than our estimates driven by continued sequential recovery in the oncology hospital segment which recorded revenue growth of 9.6% QoQ. Coupled with controlled cost EBITDA margin beat our estimates by 190bps to 15.9% (I-Sec: 14.0%).

We believe that the business has normalised and this growth trend will continue. 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. We retain ADD rating with a revised target price of Rs264/share.

* Growth recovery continued: Consolidated revenues grew 67.0% YoY and 8.4% QoQ with improving momentum in the hospital business. Oncology revenues grew 66.0% YoY and 9.6% QoQ with higher AROPB (+20.4% YoY). While, Milann (infertility) segment revenues declined 14% QoQ due to fresh lockdown. Karnataka cluster grew 59.4% YoY with significant improvement in occupancy as foreign patients started to come. Gujarat cluster grew 88.9%. 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 34.8% YoY and Maharashtra grew 77.6%.

* Margin set to normalise with improving performance: EBITDA margin improved 590bps YoY and 270bps QoQ to 15.9% despite drop in the gross margin. Effective cost control on personnel and S,G&A fronts helped offset the decline of gross margin and drive EBITDA margin beat. We expect EBITDA margin to normalise by H2FY22 and would cross 16%. We expect improving growth momentum and turnaround of new hospitals would drive operating leverage which would help in positive 430bps margin improvement over FY21-FY23E.

* Outlook: Over all we expect 21.5% revenue and 40.6% 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.

* Valuations and risks: We raise EBITDA estimates by 1-3% to factor in better margins and remain positive on the stock considering focus on niche oncology services and potential to grow faster with strengthening of balance sheet. We retain ADD with a revised target of Rs264/share based on 17xFY23E EBITDA (earlier: Rs206/share based on 16x). We have raised the target multiple to 17x from 16x considering improving business performance and margin profile. Key downside risks: Higher competition in oncology, and delay in operational turnaround of new centres.

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