Buy Max Healthcare For Target Rs.660 - Motilal Oswal Financial Services
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Impressive track record, robust outlook to sustain re-rating
Demand tailwinds to drive better valuation for industry as well
* MAXHEALTH is currently trading at 24x FY25E EV/EBITDA, representing a premium to its historical average of 22x. Moreover, it is also trading at a premium to its hospital peers (21x FY25E EV/EBITDA).
* However, we expect MAXHEALTH to continue trading at a premium on relative basis, backed by: a) significant land bank availability in high-demand areas of Delhi for brownfield expansion, b) focused approach to improve profitability per bed, and c) proven capability of strong turnaround of hospital assets.
* In fact, given strong demand tailwinds on account of a) increased insurance penetration, b) higher international patient flow, and c) enhanced healthcare awareness, we expect the valuation at the sector level to further improve going forward.
* We reiterate BUY with a TP of INR660, based on SOTP (25x EV/EBITDA on 12M forward basis for hospital business, 17x EV/EBITDA for Max Lab business, and 4x EV/sales for Max @ Home business).
MAXHEALT’s valuation moves in congruence with its operating performance
* Its 1Y forward EV/EBITDA has improved to 24x currently from 12x when it was listed in Aug’20.
* This improvement was fueled by continued expansion in ROE, reaching near 15% in FY23 from a mere 6% in FY20.
* After the Radiant-Max deal in FY20, MAXHEALT witnessed robust improvement in operating performance, with EBITDA reporting a 47% CAGR over FY19-23 and margins increasing to 27%+ from ~10% over the same period.
* This strong performance was driven by a 13% revenue CAGR and cost savings that propelled its operating leverage during FY19-23.
* Over FY19-23, ARPOB posted a 10% CAGR, led by improvement in payor/case mix. Additionally, occupancy improved to 76% (vs. 72%) with bed capacity remaining stable over the same period.
Hospital sector trading at 21x FY25E EV/EBITDA on 12M forward basis
* Currently, the hospital sector is trading at 21x FY25E EV/EBITDA as compared to 15-16x 12M forward EV/EBITDA in pre-Covid phase.
* The sector witnessed an ROE expansion due to profitability improvement, led by healthy operating leverage over FY19-23.
* Operating parameters, such as ARPOB and occupancy, saw improvements.
* This also led to increased capital allocation toward bed capacity expansion through both organic as well as inorganic routes.
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