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Dominant regional player with execution prowess

Krishna Institute of Medical Sciences (KIMS) is one of the leading multi-disciplinary integrated private healthcare services provider in Andhra Pradesh and Telangana. It operates a chain of multispecialty hospitals with focus on tertiary and quaternary healthcare. Company has a strong acquisitive history with a proven track record of execution. With recent acquisitions in Nashik and Nagpur, and proposed expansion in Bangalore and Maharashtra, KIMS has found a new growth lever in addition to strong foothold in its home markets. We are positive on the company’s long-term outlook considering: 1) strong brand recall in its home markets of Andhra Pradesh and Telangana; ii) expansion in adjacent geographies; iii) strong execution and prudent capital allocation; iv) healthy margins. We initiate coverage on the stock with a BUY rating and target price of Rs1,565/share.

* Hospital industry on a strong growth path: India’s overall healthcare market is expected to grow at a CAGR of 15-17% between FY21 and FY25 driven by rising cases of non-communicable diseases, rising government expenditure towards healthcare (including Ayushman Bharat Yojana), growing awareness, increasing affordability and pent-up demand due to the pandemic. Inpatients account for ~70% of the overall market for hospitals in value terms while remaining is from outpatients.

* Key player in southern India: KIMS has nine multispecialty hospitals (excl. Sunshine) in its home markets of Andhra Pradesh and Telangana, and is recognised for its capabilities in speciality care. Company is currently the leading player in key micro markets of the two states. Moreover, through the acquisition of Sunshine Hospitals (three hospitals), We expect KIMS to further consolidate the market in Telangana. Company follows an affordable pricing strategy whereby its services are priced lower vs key competitors. KIMS intends to add ~700 beds over three years in its home markets, which would further provide incremental revenues in addition to the current base.

* Expansion in adjacent geographies: KIMS has identified Maharashtra, Bangalore, Chennai and central India as key regions to drive the next phase of its growth. It intends to enter these geographies through a series of partnerships with reputed doctors, to further scale the operations. KIMS has acquired majority stakes in Manavata Hospitals, Nashik (in partnership with Dr. Raj Nagarkar) and Kingsway Hospital, Nagpur. Company also intends to set up a 350-bed hospital in Bangalore and a 300-bed facility in central India, over the next 2-3 years to further expand its operations.

* Outlook: Overall, we expect revenue to grow at a CAGR of 26.7% over FY22-FY24E led by consolidation of Sunshine Hospitals and Kingsway Hospital, Nagpur. We expect EBITDA margin to decline to ~28% due to the proposed expansions. RoCE is likely to depress from current levels due to high capex requirement for the expansions and acquisitions, yet remain healthy at ~18%.

* Initiate with BUY: We initiate coverage on KIMS with a BUY rating and target price of Rs1,565/share, based on 17xFY24E EBITDA. Key downside risks: slowdown in growth in south India, and delay in capacity addition.

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