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GCC clinics, new hospitals dent margins; India margins upbeat…

About the stock: Aster operates a network of hospitals, clinics, retail pharmacies in several GCC countries as well as India.

* Its network consists of 15 hospitals, 110 clinics and 245 retail pharmacies in GCC states;15 hospitals, 11 clinics and 159 labs in India; total bed capacity: GCC: 1160, India: 3905

* Revenue break-up FY22: hospitals: 56%, pharmacies: 21%, clinics: 23% with GCC & India contributing 77% & 23% of revenues, respectively

Q2FY23 Results: Beat on the revenue front but missed on the margin front

* Revenue increased 6% QoQ to | 2816 crore, driven by strong growth in Indian hospitals

* EBITDA improved 9.2% to | 319 crore. EBITDA margins improved 35 bps QoQ to 11.3%, led by strong margin improvement in India hospitals but offset by lower margins at GCC clinics and new hospitals

* Net profit declined 32.6% QoQ to | 46.2 crore, mainly due to lower other income and higher taxation

What should investors do? Aster’s share price has grown by ~1.7x over the past three years (from ~| 145 in November 2019 to ~| 250 levels in November 2022).

Target Price and Valuation: We value Aster DM at an SOTP of | 350

Key triggers for future price performance:

* Expansion via asset light model (1000 beds through O&M) in India, keeping an eye on leverage

* Strong RoCE in GCC due to assets light model, integrated business model, faster occupancy & strong brand equity, healthy ARPOB & targeted strategy

* Increased focus on asset light retail models like diagnostics, pharmacy distribution, homecare along with push towards integrated virtual platform

* It is pursuing aggressive expansion in both GCC and India via assets light model but remains on a firm footing due to FCF generation from GCC

Alternate Stock Idea: Apart from Aster, in our hospital coverage we like Narayana

* Narayana operates a dual model, which perfectly blends established ‘’assetright’’ India business (more focus towards oncology, transplants, etc, besides cardiac pedigree) with a hospital in Cayman Islands

* BUY with a target price of | 800

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