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Buy Aster DM Healthcare Ltd For Target Rs.193

Strong recovery; agressive focus on India

Aster DM Healthcare’s (Aster) Q1FY22 performance was broadly in-line with our estimates with strong recovery across GCC and India businesses. Occupancy improved by 700bps QoQ to 65% during Q1FY22. Consolidated revenue grew 35.7% YoY to Rs23.7bn (I-Sec: Rs22.9bn), 2-year CAGR of 8.1%. EBITDA margin improved 360bps YoY to 11.8% (I-Sec:12.0%) with occupancy recovery and on a low base.

We expect overall business to continue to recover and margins to improve with reducing contribution of covid-19 patients. We believe the company’s approach of asset-light expansion and an improving margin trajectory (300bps over FY21-FY23E) would aid positive FCF generation. The company is aggressively focusing on capacity addition in India and Cayman Islands to augment growth and GCC would help in driving cash generation. Maintain BUY.

* Growth recovers in hospitals across GCC and India: Revenue grew at 2-year CAGR of 8.1% led by 11% growth in GCC hospitals and 22% growth in India hospitals. GCC segment has reverted to pre-covid levels with large part of the population vaccinated in the region. Indian hospitals growth was driven by increased in occupancy to 70% vs 61% QoQ. Occupancy at GCC hospitals was down to 49%, flat QoQ and is expected to improve from Q2FY22 with improving footfalls. GCC Clinics business grew 7%, 2-year CAGR, but Pharmacy business declined 3% due to lower footfalls during the quarter on account of 2nd wave of covid-19. The footfalls at clinics as well as pharmacies have increased in the month of July.

* Margins recover and would improve further: Overall, the consolidated EBITDA margin improved 360bps YoY to 11.8% against our estimate of 12.0%. This was primarily on account of occupancy improvement in India which helped in 840/300bps YoY/QoQ improvement in India business margin. GCC margins were in line with estimate. Management guided for 17-18% sustainable margins in matured beds which is likely to be achieved over medium term. We expect the company to return to normal EBITDA margin profile in FY22E and estimate EBITDA margin to rise to 15.3% by FY23E.

* Outlook: We expect Aster to report 15.3/28.2/126% revenue/EBITDA/PAT CAGRs, respectively, over FY21-FY23E largely driven by the hospital business while clinics and pharmacies would continue their steady growth. We expect RoE/RoCE to gradually improve to 17.8%/10.7% by FY23E. The company is looking to aggressively expand bed capacity in India and construction at Cayman Islands would start soon. The management highlighted that they may consider separating GCC and India businesses in future to create shareholder value.

* Valuations: We maintain our estimates and expect growth recovery to continue in coming quarters. Maintain BUY with a SoTP-based target price of Rs193/share based on FY23E. Key downside risks: Regulatory hurdles, additional waves of covid-19 in India and delay in turnaround of new hospitals.

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