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India business sustains growth momentum

Aster DM’s 3Q was ahead of our estimates driven by better India hospitals, GCC clinics and GCC pharmacies performance. GCC hospital revenues grew 22%YoY with 16.1% margin (18% adj. for new hospital losses). India hospitals beat estimates yet again with 15.7% EBITDAM (JMFe: 17%), lower due to Aster Lab losses. The management expects India business to continue momentum as: (1) Kerala cluster has been operating at 80%+ occupancies; (2) AP-Telangana cluster occupancies are improving gradually; and (3) O&M hospital additions will add incremental revenue. Reverting to pre-pandemic trend, Aster’s 2H tends to be higher contributing 60-65% of full year due to GCC seasonality (1H weaker). Aster is focusing on Saudi markets with Sanad operating at ~10% margin. Aster has also launched their pharmacy business in Saudi, partnering with Al Hokair group to create a network of 250 pharmacies over the next 5 years. The management stated that GCC business will be sold/ seperated from India business completely and binding bids are expected to be received by 1Q24. Aster’s consistent India outperformance, Saudi focus, GCC growth and restructuring progress gives us comfort on our positive stance. Maintain BUY with an SOTP-based Sep’23 Price Target of INR 260.

* India, the growth engine: India hospitals grew 28%YoY/2%QoQ (12% beat) with 15.7% EBITDA margins below our estimates (~17%) due to losses from Aster Labs. Andhra and Telangana cluster occupancies will improve gradually as more outreach programs and restarting of scheme patients contribute. Aster has taken 5-10% price increase in India across certain therapies which is visible in higher ARPOBS (INR 37200 in 3Q vs. 33600 YoY). Medical tourism, which is picking up again, contributes 7-8% of revenue. The company has added 390 beds under O&M in FY23 and plans to acquire 2-3 more hospitals of 300-400 beds. O&M model hospitals have lower EBITDA margins but require minimal capex and is hence ROCE accretive. The company is expanding Aster labs, having 2 reference labs, 18 satellite labs and 157 PECs and expects breakeven next fiscal thereby focusing on profitability. 239 pharmacies across 4 states in India are operated by ARPPL under brand license from Aster. Aster plans its e-commerce foray in FY24, launch 100+ private lable products and launch large format stores.

* GCC clinics and pharmacies outperorm: GCC revenues grew 19%YoY (32%YoY exCovid). GCC Hospitals reported revenue growth of 22% YoY with EBITDA margins at 16.1% (JMFe: 18%). The lower margins were due to loss from new hospitals (Aster Sharjah, Aster Royal, Aster Sonapur) adjusted for which margins were 18.1%. Sanad hospital, which was EBITDA negative in FY22, has turned around and continues to perform well (10% EBITDAM). Aster has launched pharmacy operations in Saudi Arabia with Al Hokair Group- a plan to create a network of 250 pharmacies in the next 5 years. GCC Clinics Revenue grew 4%YoY (35%YoY ex-Covid) while EBITDA was 21.5% (JMFe: 15%). The improvement is expected to sustain and primarily due operational efficiencies. GCC pharmacies beat expectations by 14% on revenues with 130bps beat on margins (JMFe: 10.5%). One Aster app has been fully launched in UAE and had 1 mn transactions.

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