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Growth levers in place; Initiate coverage with a BUY rating

* Max Healthcare Institute (MAXHEALT) is a leading healthcare service provider, with major concentration in North India. The MAXHEALT network comprises 17 hospitals (with 3,270 operating beds) owned/managed by the company.

* MAXHEALT has a proven track record of improving the profitability of its hospitals and is leading its peers across operational parameters. In fact, it has a substantial land bank in existing locations, which enhances growth prospects over the next three to      five years.

* After reporting 13%/57% revenue/EBITDA CAGR over FY19-22 to INR52b/ INR16b, we expect MAXHEALT to deliver 16%/17% revenue/EBITDA CAGR over FY23-25 to INR77b/INR21.5b and an ROIC of 20% in FY25 (v/s 14% in FY22), due to: a)       reducing share of institutional patients, b) higher international patients flow driven by strong brand recall, and c) ongoing cost management measures. The roadmap of more than doubling its operating beds over the next five years remains on track largely   due to strong internal accruals. The inorganic initiative would also be another potential driver of earnings growth, given its strong turnaround capability.

* We value MAXHEALT on an SOTP basis (Hospitals/MaxLab at 23x/15x 12M forward EV/EBITDA and Max@Home at 2x EV/Sales) to arrive at our TP of INR530.

 The demand factors for the hospital/diagnostic industry in India remain favorable aided by rising income, healthcare needs and higher health insurance penetration. MAXHEALT is well placed to benefit from the opportunities given it is strategically located in metro cities and possesses strong execution capabilities. We initiate coverage on the stock with a BUY rating.

Ticking all the boxes on operational parameters of hospitals

* MAXHEALT has delivered a strong 48% CAGR in operating EBITDA per bed to INR5.7m over FY20-22. Even during 9MFY23, it has reported 21% YoY growth in operating EBITDA per bed to INR6.4m. This was led by: a) case mix/payor mix optimization, driving 8% CAGR over FY20-22 as well as 16% YoY growth over 9MFY23 in Average Revenue per Operating Bed (ARPOB), b) elevated occupancy levels and c) operational cost measures.

* Management has chalked out plans to improve the key operating metrics of hospital business further. It intends to reduce the institutional payor mix to 15% of beds over the next 1-2 years from 28% (17% of revenue; 9MFY23), which would not only increase the ARPOB but also improve profitability.

* MAXHEALT is uniquely positioned with its concentration in metros, its clinical excellence, and international affiliations to further improve the revenue share from international patients. These patients are the highest ARPOB payors and thus their increased share would drive profitability for MAXHEALT further. We expect 32% sales CAGR to INR11b over FY23-25 from this segment.

* The company is running at 76% occupancy at end-9MFY23. It plans to more than double its bed capacity to 7,442 by FY28. Interestingly, the expansion will largely be brownfield in nature and would be funded from internal accruals, thereby adding enough visibility for bed additions.

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