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India recovers; GCC recovery remains slow

Aster DM Healthcare’s (Aster) Q3FY21 performance was below our estimates due to weak growth in GCC hospitals. Overall occupancy remained flat YoY and QoQ at 57% during Q3FY21. Consolidated revenue declined 2.7% YoY to Rs22.6bn (ISec: Rs23.8bn), India hospitals witnessed healthy recovery with 7.7% YoY growth. EBITDA margin declined 210bps YoY to 14.5% (I-Sec:15.0%) on a high base. We expect overall business to stabilise by Q1FY22 and expect strong 18.6% revenue growth in FY22E. We believe the company’s approach of asset-light expansion and an improving margin trajectory (140bps over FY20-FY23E) would aid positive FCF generation. The company recently announced its expansion to Cayman Islands with a 150 beds multi-specialty hospital for US$120-130mn and is exploring various options to fund the same. Maintain BUY.

* India recovers, GCC to normalise soon: Revenue declined 2.7% YoY due to weak performance in GCC region. GCC segment revenue dropped 5.1% YoY while Indian hospitals grew 7.7%. Easing of lockdown restrictions in India aided the improvement in occupancy. India hospital witnessed increased footfall resulting in higher occupancy at 61% vs 58% QoQ. GCC hospital revenue grew 1.3% YoY but down QoQ as Q2FY21 was aided by pent-up demand. Occupancy at GCC hospitals was down at 47% vs 56% QOQ. GCC Clinics and Pharmacy business declined 1.3% and 15.1% QoQ respectively due to reduction in footfall. Another wave of COVID-19 has impacted the business in GCC region and we expect gradual recovery over next two quarters.

* Lower occupancy at GCC impacted margin: Overall, the consolidated EBITDA margin dropped 210bps YoY but improved 250bps QoQ to 14.5% against our estimate of 15.0%. Lower revenue in GCC hospitals business along with higher S,G&A expenses impacted the margin. We expect the company to return to normal EBITDA margin profile in FY22E and estimate EBITDA margin to rise to 15.8% in FY23E. Pre IND-AS EBITDA would improve from 11.1% in FY20 to 12.5% in FY23E.

* Outlook: We expect Aster to report 10.1/13.5/35.9% revenue/EBITDA/PAT CAGRs, respectively, over FY20E-FY23E largely driven by the hospital business while clinics and pharmacies would continue their steady growth. Reduced capex requirement and improving margin would aid positive FCF generation. We expect RoE/RoCE to gradually improve to 17.2%/10.5% by FY23E. The company reduced net debt by Rs3bn in 9MFY21 from internal accruals.

* Valuations: We cut revenue and EBITDA estimates by 3-4% and 3-12% respectively for FY21-FY23 to factor in weak Q3 and lower occupancy at GCC. We maintain BUY with a revised SoTP-based target price of Rs200/share based on FY23E (earlier: Rs196/share based on Sep’22E). Key downside risks: Regulatory hurdles, delay in recovery post COVID-19 and delay in turnaround of new hospitals.

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