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AFFORDABLE HEALTHCARE WITH HIGH GROWTH!

We initiate coverage on Krishna Institute of Medical Sciences Ltd (KIMS) with a BUY rating and a target price of Rs 1570 (EV/EBITDA 22x for FY24E EBITDA), implying an upside potential of 28% from the current levels. KIMS operates nine multi-speciality hospitals with an aggregate bed capacity of 3,064. Its current occupancy rate stands at 58% implying a significant growth potential over a period of time which will further contribute to the company's overall growth. KIM’s focus on affordable health services has led to Average Revenue Per Occupied bed (ARPOB) of Rs 28,820, which is 35% lower than the industry average. KIMS has planned to add incremental bed capacity by 50% over the next 36-40 months. Furthermore, it has the highest return ratios with RoIC of 32% in the industry exhibiting low Capex per bed (Rs 36 Lc/bed) and high EBIT margins (22.7%).

Focus on affordable healthcare to propel growth

KIM’s is focused on affordable health services across Tier II and Tier III cities with Average Revenue Per Occupied bed (ARPOB) standing at Rs 28,820, 35% lower than the industry average of Rs 38,400. This has led to high revenue growth. Operating leverage derived from higher volume delivered the highest EBITDA margins (+28%) as compared to average industry margins (+17.8%). The company has achieved this by controlling capital and operating expenditure along with a multidisciplinary approach. KIMS treatment costs across medical procedures are on an average 20-30% lower than other private hospitals in India

Disciplined Growth Strategy - Growth from existing assets and new markets

KIMS has planned to add an incremental bed capacity of 1,500 (50%) from the current bed capacity of 3,065 over the next 36-40 months. This could lead to a total bed capacity of 4,500. It is planning to add an incremental 500 capacity in current hospitals to meet growing demand. Furthermore, an incremental 1,000 bed capacity in adjacents markets such as Bangalore, Chennai, Bhubaneswar, Indore, Aurangabad, and Nagpur. KIMS is expected to incur a Capex of Rs 300 Cr per year over the next 3-4 years to create these capabilities.

High RoIC among peers due to low capital and operating costs

KIMS has the highest return ratios with RoIC of 32% due to 1.) Lowest Capex per bed (Rs 36 Lc/bed) and 2.) Highest EBIT margins 22.7%. Low Capex strategy is a mix of acquiring land in advance and constructs building on their own to reduce costs and another is acquiring land on a long-term lease with low-cost terms to avoid high rental costs. KIMS has achieved the highest EBIT margins in the industry by controlling doctors costs (doctor participation model) and no rental expenses. High RoIC (32%) led to generate a strong cash flow of ~ Rs 300 Cr every year enabling the company to achieve net debt-free status. We expect KIMS cashflow generation of Rs 300 Cr every year plus minimum debt required to fund incremental bed capacity in the next 36-40 months.

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