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Aster DM’s 1Q Revenue/EBITDA was ahead of JMFe primarily driven by strong GCC performance. Reported PAT was lower than estimates due to one-time tax charge of INR 443mn and new hospital losses of INR 230mn adjusted for which PAT grew 87%YoY. GCC hospital revenues grew 19%YoY with c. 15.6% margin (17% adj. for new hospital losses). The India Hospital revenues (6% beat) was driven by strong ARPOB growth due to price hikes, better case mix and higher cash patients which is expected to sustain going forward. India hospitals reported c.15% EBITDAM dragged by losses from Aster Labs, pharmacies and new O&M hospitals. 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; (4) Aster Labs to breakeven in FY24; and (5) strong ARPOB growth. On GCC restructuring, the board is evaluating the binding bids received but there has been some delay due to transaction structure complexities. We increase our India multiple to 17x (vs. 15x earlier) due to improving performance (and higher contribution) and continue to believe that Aster’s restructuring exercise can unlock further value. Maintain BUY with an SOTP-based Mar’24 Price Target of INR 335.

* India, the growth engine: India business grew 29%YoY/1%QoQ (6% beat) with 14.7% EBITDA margin 130bps below of our estimates (16%). India hospitals (excl. labs, pharmacies, O&M etc.) was at ~19% in 1Q. overall occupancies improved to 67% (excl. O&M). Kerala cluster has reached 77% occupancy levels. Aster has taken 5-10% price increase in India across certain therapies which, along with better case mix, is driving higher ARPOBS (INR 39400 in 1Q vs. 37250 QoQ). Over the short term, the company believes that it can drive 8-10% ARPOB growth given the higher cash business 50-60%. 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 is expected in 2HFY24 which will partly improve overall 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. Currently there are 214 PEC’s, 14 satellite labs and 1 reference lab operated by Aster Labs. 255 pharmacies across 4 states in India are operated by ARPPL under brand license from Aster. Aster plans its e-commerce foray in FY24. This business is likely to be profitable by FY25.

* GCC clinics and pharmacies outperform: GCC revenues grew 18%YoY (15%YoY ex-new hospitals). GCC Hospitals reported revenue growth of 19%YoY with EBITDA margins at 15.6% (JMFe: 12.5%). The lower margins were due to loss from new hospitals (Aster Royal) adjusted for which margins were 17.4%. Sanad hospital, which was EBITDA negative in FY22, has turned around and sustained margins. The company will launch Saudi pharmacies (with Al-Hokair group) in Oct’23. GCC Clinics revenue grew 16%YoY 27%YoY ex-Covid) while EBITDA was 18.2% (JMFe: 16%). GCC pharmacies revenue grew 24% YoY were ahead of expectations (6% beat), EBITDA margins came in at 9% Fe: 10%). The overall GCC performance has been encouraging.

* Update on GCC restructuring: There has been significant progress on the GCC restructuring as they are actively involved in discussion with the shortlisted parties. The Board is evaluating the proposal and there has been some delay due to various complexities. The promoters intend to remain a part of both the entities. 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. GCC restructuring is expected to unlock value (20-25%) for the shareholders but we await more clarity on timelines and valuation. The promoters increased their stake by 4% to 41.9% but their pledge increased to 99% (vs. 10% of holding).

* Key Financials: Revenue/EBITDA/Adj. PAT of INR 32bn/3.9bn/529mn grew +21%/+33%/- 23% YoY and was +10%/+16%/-22% vs. JMFe. EBITDA margin of 12% (JMFe: 11.5%; 11% YoY). Adj. PAT was INR 529mn (adjusted for one-off deferred tax expense). GCC hospitals grew 19%YoY to INR 10.9bn (15% beat) with EBITDA margins of 15.6% (14.6%YoY; JMFe: 12.5%). GCC Clinics grew 16%YoY to INR 6.3bn (16% beat) with margins of 18.2% (16.9%YoY; JMFe: 16%). GCC Pharmacies grew 24%YoY to INR 8.2bn (11% beat) with margins of 9% (8.8%YoY; JMFe: 10%). India hospitals, clinics & labs beat estimates (6% beat) growing 29%YoY to INR 8.4bn. India hospital margins were 14.7% (12.9%YoY; JMFe: 16%). Net debt (excl. lease liabilities) was INR 20bn (vs. 18.5bn YoY) and Net Debt(excl. lease liabilities)/ EBITDA stood at 1.7 (vs. 1.6 YoY)

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