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Medanta’s 4Q earnings surprised positively driven by better EBITDA margins and higher other income coupled with lower tax rate. Medanta has delivered Revenue/EBITDA/PAT CAGR of 36%/79%/237% respectively over FY21-23. We see new hospitals contribute 33% to revenues in FY23 (vs. 10% in FY19). The new hospitals have ramped-up exceptionally well lending a strong support to overall earnings growth which we expect to sustain. They continue to optically lower the overall ARPOB and occupancy level over the next two years as we see addition of nearly 600 beds. We remain conservative on our margin assumptions due to (1) cost increases amid bed additions; (2) payer mix normalising in Patna and Lucknow; and (3) Noida launch by end of FY25. However, we expect the benefit of recent price hikes to fully reflect in FY24. Matured hospitals posted 26%YoY growth in FY23 and we expect double digit growth to sustain in FY24/25 as there is expansion of capacities for mother & child, oncology etc. and new doctor additions. Noida (FY25 end) and Indore (FY27) remain on track thereby providing future revenue visibility. We continue to believe that Medanta’s consistent earnings growth with margin expansion will drive consensus earnings upgrade. We increase our FY24/25 earnings by 19%/20% to factor in lower interest costs, faster Patna ramp up, price hikes and higher EBITDA contribution from Lucknow. We increase our multiple to 20x (vs. 19x earlier) given the robust cashflow, continuing earnings momentum and scope for potential inorganic acquisitions to derive a Mar’24 Price Target of INR 665. Maintain BUY.

* Developing hospital margins surging: Medanta’s early Patna breakeven and exceptional Lucknow ramp-up has led to developing hospitals revenue increasing by 83%YoY to INR 7.4bn with ~29% EBITDA margin in FY23. This margin expansion, in our view, is led by Lucknow which could be operating at ~33% margin and Patna at double digit EBITDAM. Developing hospitals’ ARPOB were flat YoY (-6%YoY in 4Q) due to Patna ramp-up which has lower ARPOB of ~45k (PPP model). During the year, Medanta added 293 beds and we expect more bed additions in Lucknow (200 beds) and Patna (70 beds) in FY24 to drive mid-teens revenue growth for the company. While new beds will keep margins in check, the exceptional turnaround of new assets builds confidence around positive surprises on execution. By end of FY25, we expect Noida to contribute to revenues. The share of developing hospitals to revenue has increased to 33% in FY23 (vs. 10% in FY19). Medanta continues to add clinicians, new specialties and latest medical equipment.

* Mature hospitals grow steadily: In FY23, Mature hospitals grew 12%YoY with flattish EBITDAM due to higher corporate costs, marketing costs and repair and maintenance. ARPOB improved 11%YoY to INR 60456 (vs. INR 54273) and we expect this to gradually improve (2-3%) going forward. We expect cost drag to reduce in FY24 thereby improving margins by c.100bps over FY23-25. Occupancies were lower at 58% in FY23 (vs. 60% FY22). Medanta started lung transplant in Gurgaon and will add ~100 beds for oncology, mother and child (M&C) etc. and 80 doctor additions will allow sustain growth in mature hospitals

* ~1000 bed additions over FY23-25 to keep in Medanta in fast lane: We expect 700-750 total beds to be installed in existing facilities over the next 2 years thereby reducing cash outflow. We expect 60% of INR 10bn capex for Noida hospital which will start contributing from FY25 and breakeven by end of FY26. Medanta also announced operation and maintenance of a 300 bed hospital (100+ critical care beds) 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 4.7bn+ cash, Medanta has sufficient headroom for inorganic acquisition. Medanta announced service offerings across the continuum vide (1) Medanta Labs, which started in Jan’23, opened 22 collection centres. They plan to add 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 – 31000+ home care patients served in FY23.

* Key financials: Revenue/EBITDA/PAT of INR 7bn/1.6bn/1bn grew 35%/106%/476%% YoY and were +1%/+6%/+39% vs. our estimates. Gross margins improved 100bps YoY to 76.6%. EBITDA margins grew 800bps YoY at 23.2% (vs. 23% QoQ; JMFe: 22.1%). EPS was 3.8 (vs. 0.7 YoY). ARPOB for the quarter was INR 60880 (vs. INR 58367 QoQ: INR 56624 YoY). Occupancy was 58% (vs. 59%QoQ; 52%YoY). Mature hospitals revenue increased 26%YoY to INR 5.3bn with EBITDAM improving 500bps to 24.7%. ARPOB and occupancy for mature hospitals was INR 63053 (vs. INR 55804YoY) and 58% (vs. 54%YoY) respectively. Developing hospitals’ revenue grew 84%YoY to INR 2bn in 4Q with EBITDAM at 30.9%. ARPOB and occupancy were INR 56194 (vs. INR 59846 YoY) and 58% (vs. 48% YoY) respectively. Lower ARPOBs were due to Patna ramp-up (has a lower ARPOB due to PPP model) and has achieved breakeven in first full year of operations.

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