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Growth driven by GCC hospitals and pharmacies

Aster DM Healthcare’s (Aster) Q3FY23 performance exceeded our expectations on revenue front, largely driven by strong growth in GCC hospitals and pharmacies. Consolidated revenue grew 20.5% YoY to Rs31.9bn (I-Sec: Rs28.1bn). GCC hospitals posted healthy growth of 22% YoY. India hospitals revenue was up 18.9% YoY (-5.5% QoQ). EBITDA margin contracted 90bps YoY to 14.1% (I-Sec:14%). We expect overall business and margins to improve with higher occupancy and case mix. We believe in the company’s strategy of asset-light expansion, especially in India, as it supports growth and lifts margins. Key trigger for the stock includes the proposed restructuring of the business. Recent correction in the stock price (~9% in last 3 months) makes valuations reasonable and hence, we upgrade the stock to BUY with a revised SOTP-based target price of Rs262/share (earlier: Rs270/share).

* Business review: Revenue grew 20.5% YoY (+13.3% QoQ) led by 22% YoY growth in GCC hospitals. GCC hospitals grew at a 3-year CAGR of 10.2%. Occupancy at GCC hospitals was up to 50% vs 49% QoQ. GCC clinics revenue grew 3.9% YoY (+25% QoQ). Pharmacy business grew 26.6% YoY (+20.3% QoQ) support by strong seasonality. India hospital revenues were up 18.9%(-5.5% QoQ). EBITDA margin declined 90bps (+270bps QoQ) YoY to 14.1%. EBITDA margin of India hospitals and GCC hospitals were largely flat YoY to 18% and 16.2% respectively. We estimate EBITDA margin to expand to ~17% over FY22-FY25E supported by healthy growth in domestic business.

* Key concall highlights: 1) O&M hospitals: Margins in these hospitals are expected to be comparatively lower at ~15%, but may boost RoCEs with lower capex spends. 2) Pharmacies: i) Company does not want to expand as much as peers. It expects to close with ~260-270 pharmacies by the end of FY23, with ~120-125 pharmacies to be added in FY24, ii) Aster seeks an omni-channel strategy for the segment, supported by its online app, iii) in south, the company is looking at opportunities in Tamil Nadu. 3) Restructuring: Company plans to separate GCC business entirely from the India listed company. It is likely to receive binding bids in Q1FY24

* Outlook: We expect Aster to report 10.7%/16.7%/30.7% revenue/EBITDA/PAT CAGR over FY22-FY25E driven largely by hospital business. RoE and RoCE are expected to improve to 20.1% and 12.8% by FY25E, respectively. Company is aggressively expanding its bed capacity in India.

* Valuations: We raise our revenue estimates by ~3-4% over FY24E-FY25E to factor in the healthy growth of GCC pharmacies business. However, we lower our EBITDA estimates by ~1-2% over the same period due to lower GCC hospital margins. Recent correction in the stock price has made valuations reasonable and hence, we upgrade to BUY with SoTP-based revised target price of Rs262/share (earlier: Rs270/share). Key downside risks: Regulatory hurdles, additional waves of covid in India, and delay in turnaround of new hospitals.

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