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Impressive margin performance

Medanta’s earnings are tracking well ahead of JMFe on FY23 basis. ARPOBs grew 9%YoY to INR 58494 for 9M driven by better specialty mix and lower internal medicine. This also resulted in gross margin improvement by 180bps YoY to 77.3%. ALOS has normalized while occupancy levels have been trending ~59% (in line with estimates) with scope to improve as newer beds gradually ramp up. New hospital revenues are tracking well ahead of estimates with Patna turning EBITDA positive in 2Q thereby reducing the drag on FY23 margins. Medanta’s aggressive bed expansion (~700 beds in Patna and Lucknow) will keep occupancy and ARPOB optically subdued. We expect consistent earnings growth with margin expansion as new capex settles thereby yielding better earnings contribution. Price hikes and better therapy mix will support EBITDA and cushion from cost inflation. International patient footfall continues to grow. We increase our FY24/25 earnings by 4%/5% to factor in faster ramp up and higher margins. Maintain BUY with a revised Price Target of INR 575.

* Well-balanced hospital mix to drive healthy sustainable growth: Medanta has a wellbalanced mix of mature, developing and planned hospitals, which offers sustainable longterm growth visibility. The company’s hospitals are strategically positioned in underserved areas such as Lucknow, Patna, NCR, Indore etc. which provides impetus to growth. We expect steady growth to come from sweating of mature assets (Gurgaon, Indore, Ranchi) thereby improving key metrics (ARPOBs/ occupancies) and margins. Increasing contribution from developing hospitals (Lucknow, Patna) will bolster revenues but newer capacities will keep margins in check in over the near term. Lucknow’s stellar success of achieving breakeven in the first full year of operations, 28%+ EBITDA margins and 30% revenue CAGR over FY22-25 demonstrates exceptionally strong execution capabilities of Medanta. Patna has achieved breakeven in 2Q significantly ahead of our expectations. We expect robust performance (like Lucknow) from Patna as well. In 9M23, Mature hospitals grew 8%YoY with EBITDA flattish due to higher corporate costs, conference costs and repair and maintenance. We expect this cost drag to reduce in FY24. Developing hospitals grew 82%YoY with a whopping 131% growth in EBITDA

* Growth strategy: : Medanta has completed majority capex pertaining to Lucknow and Patna with incremental capex to install beds gradually. We expect INR 10bn capex for Noida hospital which will start contributing from FY25. The capex will be funded primarily through internal accruals and debt. Medanta also announced signing of term sheet for operation and maintenance of a 300 bed hospital in Indore. The hospital is expected to be ready by FY27 which provides further long term revenue visibility. Given their robust cash reserves of INR 5bn+ cash, Medanta has sufficient headroom for inorganic acquisition. Medanta announced service offerings across the continuum i.e. diagnostics vide (1) Medanta Labs- plan to open 25 centres in FY23 and 10+labs and 125+ collection centres in the next phase; (2) RWA and clinic network – operates 6 clinics across 4 cities. New mediclinic inaugurated in Gurgaon in Nov’22; (3) Homecare – 4000 nursing visits during 9M23 in Gurgaon, Lucknow, Patna.

* Key financials: Revenue/EBITDA/PAT of INR 6.9bn/1.6bn/806mn grew 19%/18%/15% YoY. Occupancy during the quarter was 59% (vs.60% YoY). ARPOB improved 4%YoY to INR 58367. Total census beds grew to 2571 (vs. 2404 at the end of FY22). ALOS was 3.26 (vs. 3.53YoY). OPD volumes (‘000) grew 16%YoY 554 whereas IPD volumes grew 23%YoY to 35. For the 9MFY23, mature hospitals grew 8%YoY to INR 14.9bn with EBITDA flattish at INR 3.3bn. ARPOB grew 11%YoY to INR 59607. Developing hospitals grew 82%YoY to INR 5.4bn with EBITDA surging 131%YoY to INR 1.5bn. ARPOB grew 3%YoY to INR 55911. The ARPOB is lower for developing hospitals due to newer beds and Patna’s lower ARPOB on account of PPP model. Pharmacy reveneus grew 58%YoY to INR 625mn for 9MFY23.

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