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Margins continue to improve; outlook better…

About the stock: HCG operates one of the largest private cancer care networks in India with end-to-end solutions available under a single corporate entity. Owing to exclusive agreement with vendors, HCG procures equipment on a deferred payment basis. Milann offers seven fertility centres in India.

* HCG network has 22 comprehensive cancer centres (one in Kenya), four multi-specialty hospitals. HCG India, capacity beds: 1944; 1702 operational

* Revenue mix FY22: HCG:96%, Milann:4%; occupancy FY22: 58.3%; ARPOBD FY22: 36,697

Q2FY23 Results: HCG reported continued momentum at HCG centres this quarter.

* Revenues grew 3% QoQ to | 420 crore

* EBITDA grew 7.7% YoY to | 78 crore. EBITDA margins improved 81 bps QoQ to 18.5% amid better operational leverage

* Adjusted net profit increased 71.6% QoQ to | 10.4 crore

What should investors do? HCG’s share price has grown by ~2.54x over the past three years (from ~| 114 in November 2019 to ~| 290 in November 2022).

* Maintain BUY due to 1) improvement in occupancies sustainable, 2) newer assets to turn profitable and complement existing centres and 3) calibrated expansion of moving in metros and non-metros now coming to the fore

Target Price and Valuation: We value HCG at | 370 (HCG existing centres and new centres at 13x & 11x, respectively, at FY24E EV/EBITDA and Milan centres at 1x FY24E EV/sales).

Key triggers for future price performance:

* HCG, with its integrated, one-stop-solution and focused model, is well poised to capture growing potential with pan-India focus on cancer therapy

* Focused on consolidating existing network through cost optimisation measures to improve margin and ramping up patient’s footfall by engaging in direct-to patient promotion strategies

* Oncology cases are expected to increase by 100,000 to 350,000 cases a year which bodes well for HCG with hybrid presence (Metros/Tier-2,3 towns)

* De-leveraging of balance sheet, reduction of losses across new centres have substantially eased legacy overhangs, improvement in consolidated return ratio profile still remains key

Alternate Stock Idea: Apart from HCG, in our hospital coverage we like Narayana.

* Narayana operates a duel model, which perfectly blends established ‘’Assetright’’ India business with a hospital in Cayman Islands

* BUY with a target price of | 855

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