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India outperformance to continue

Aster DM’s 4Q Revenue/EBITDA was broadly in-line with JMFe driven by better India hospitals, GCC clinics and GCC pharmacies performance. However, PAT missed estimates by 9% due to lower other income, higher finance costs and depreciation. GCC hospital revenues grew 15%YoY with 13.7% margin (17% adj. for new hospital losses). India hospitals beat estimates yet again with 15.8% EBITDAM (JMFe: 15%), lower due to Aster Lab losses. We expect India business to continue its robust momentum as: (1) Kerala cluster has been operating at 80%+ occupancies; (2) AP-Telangana cluster occupancies are improving gradually; (3) O&M hospital additions will add incremental revenue; and (4) Aster Labs to breakeven in FY24. On GCC restructuring, the management expects binding bids to be received by 1Q24 post which the board will review the proposal. The management intends to distribute dividend from the sale proceeds. Aster’s consistent India outperformance and GCC value unlocking initiative gives us comfort on our positive stance. Maintain BUY with an SOTP-based Mar’24 Price Target of INR 300.

* India, the growth engine: India business grew 32%YoY/1%QoQ (4% beat) with 15.8% EBITDA margins 80bps ahead of our estimates (15%). India hospitals (excl. labs, pharmacies, O&M etc.) was at ~19% in 4Q. Kerala cluster has reached 80% occupancy levels. We expect Andhra and Telangana cluster, which has reached double digit EBITDA margin, to improve occupancies gradually 9early trends are promising). Aster has taken 5- 10% price increase in India across certain therapies which is visible in higher ARPOBS (INR 37900 in 4Q vs. 36750 YoY). 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 (of ~15%) and lower ARPOB (15-20K) but require minimal capex, ramp up faster and is ROCE accretive. Aster Labs breakeven in 2Q-3Q FY24 will improve India business margins in FY24. The focus for the labs business is profitability, with the company loooking to drive higher volumes by expanding B2B reach, increasing PEC centres and home collection. 257 pharmacies across 4 states in India are operated by ARPPL under brand license from Aster. Aster plans its e-commerce foray in FY24.

* GCC clinics and pharmacies outperform: GCC revenues grew 16%YoY (29%YoY exCovid). GCC Hospitals reported revenue growth of 15% YoY with EBITDA margins at 13.7% (JMFe: 17.2%). The lower margins were due to loss from new hospitals (Aster Sharjah, Aster Royal, Aster Sonapur) adjusted for which margins were 17%. Sanad hospital, which was EBITDA negative in FY22, has turned around and continues to perform well (8%+ EBITDAM in FY23). The company entered into a partnership with SUPUN to launch 2 new health insurance plans. The company is optimising HR costs to the tune of 3-5%. 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 3%YoY (38%YoY ex-Covid) while EBITDA was 22.1% (JMFe: 18%). GCC pharmacies revenue grew 31% YoY were broadly in-line with expectations (1% miss), EBITDA margins came in at 16% (JMFe: 12.5%).

* Update on GCC restructuring: The investment bankers are working with shortlisted potential buyers and advisors. The preparatory work including due diligence is largely complete. The investment bankers communicated that the binding bids will be received by 1Q24. Upon submission of the bid, the board shall review the proposal. The GCC entity is consolidated under their Mauritius entity and hence no capital gains tax will be payable. The cash received will be distributed as dividends. The promoters increased their stake by 4% to 41.9% but their pledge increased to 99% (vs. 10% of holding). The management clarified that it wasn’t for GCC restructuring. GCC restructuring is expected to unlock value for the shareholders but we await more clarity on timelines and valuation.

* Key Financials: Revenue/EBITDA/PAT of INR 32.6bn/5.1bn/1.7bn grew 20%/9%/-25% YoY and was -2%/0%/-9% vs. JMFe. The ex-Covid revenue growth has been c. 30%YoY with EBITDA margin coming in at 15.5% (JMFe: 15.3%; 17% YoY). The PAT was INR 2.4bn (adjusted for new hospital losses). Net Debt (excl. lease liabilities) as on Mar’23 was INR 5.1bn for India and INR 13.4bn for GCC

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