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Work in progress for meaningful bed additions

* Max healthcare (MAX) reported a miss on earnings for 1QFY24, primarily due to increased opex. Having said this, MAX has been on track to enhance ARPOB on the back of increased high end treatment and a greater proportion of international patients. Additionally, with the growing demand for healthcare services MAX’s focal cities, we expect occupancy to improve moving forward.

* We maintain our earnings estimate for FY24/FY25. We value MAX at 25x EV/EBITDA to arrive at a price target of INR650 on 12M roll-forward basis.

* While better realization and improving operational efficiency are the major factors driving 21% earnings CAGR over FY23-25, it is implementing efforts for bed additions (780 beds; 23% increase from current bed size) to growth momentum over the next three to five years. It continues to evaluate the inorganic opportunities as well. We reiterate our BUY rating on the stock

Stable EBITDA per bed QoQ, despite seasonal weakness and higher opex

* For 1QFY24, Max network revenues (including trust business) grew 17% YoY to INR16.2b (our est: INR16.3b).

* EBITDA margin was flat YoY at 26.4% (our est. 28.5%).

* Accordingly, EBITDA grew 17% YoY to INR4.3b (our est. INR4.6b).

* Adjusted PAT grew 28% YoY to INR3b (our est. INR3.3b), led by strong operational performance, interest income for 1QFY24 (vs. interest expense in 1QFY23) and higher other income (>2x YoY).

* In 1QFY24, ARPOB grew 13% YoY (6% QoQ) to INR75K. This implies volume growth of 4% YoY for the quarter. ARPOB growth was driven by a) a higher volume of treatments in Oncology, Orthopedics, & Cardiac indications (+200bp YoY as % of sales), b) price revisions in the institutional (CGHS) segment (0.6% of ARPOB), and c) a greater proportion of international patients (+110bp YoY as % of sales)

* Despite an increase in ARPOB, EBITDA margin remained flat YoY as higherend treatments led to increased opex. Having said this, EBITDA per bed on a YoY basis grew 14% YoY to INR7m.

Highlights from the management commentary

* On a QoQ basis, there is an increase in opex due to annual increments. Additionally, 1Q is a seasonally weak quarter when compared to 4Q. Despite these factors, the EBITDA per bed remains consistent QoQ at INR7m.

* In Max Shalimar facility, revenue/EBITDA grew 37%/43% YoY in 1QFY24 on the back of bed additions (~122 in recent months) and superior case mix.

* The 180-bed Mohali hospital has excavation activities underway. The management indicated that the hospital would be completed in 4QFY25.

* The Nanavati 300-bed hospital is also expected to be completed by 4QFY25.

* At the end of 1QFY24, the FCF from operations stood at INR2.6b, of which INR0.4b was deployed toward ongoing capacity expansion projects. Net cash position improved to INR9.6b.

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