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Record profits amid robust Cayman, domestic show

Narayana posted strong QoQ, YoY growth, better than our estimates across all fronts. Revenues grew 12.8% YoY to | 838 crore with India sales growing 9.5% YoY to | 700 crore. Revenues from Cayman operations grew 30.6% YoY to US$18.5 million due to lower base and strong ARPOB traction. On the EBITDA front, margins expanded 399 bps to 16.9% amid lower employee & other expenditure. Subsequently, EBITDA grew 47.7% YoY to | 141 crore. Adjusted PAT for the quarter was at | 68 crore, nearly 3x Q4FY20.

Blended model of affordable + high-quality services

The company has a legacy model based on affordability over the years. Due to strict control over costs and capital, Narayana was making reasonable profit. However, as it looks to scale up in other regions, where the consideration for quality has more weight than affordability, the model is likely to be modified from ‘’affordable’’ to a mix of affordable + quality at premium. Cases in point are the recent acquisition of Gurugram Hospital and buying out of partner in the Cayman Islands hospital internationally where acquisition costs were optically higher.

‘’Asset right model’’ to improve return ratios

Under this model, Narayana engages with partners who invest in land, building while it takes care of medical equipment, hospital management on a revenue share basis. However, the management has maintained a flexible approach in this regard. Thus, it also owns some hospitals where the opportunity is right. Due to this focus on b/s and likely improvement in average realisation per operating bed (ARPOB) by optimising case mix, we expect an improvement in RoCE from 11% to 15.0% in FY20-23E

Valuations & Outlook

The company posted a very strong operational performance in Q4 backed by uptick in elective surgeries. As of Q4FY21, Narayana’s operations reached ~112% of pre-Covid (February 2020) levels. In view of significant near-term headwinds due the second Covid wave, the management remains committed to reduce costs, increase efficiency and calculated capex (New Cayman and pending India brownfield). As the pandemic situation eases out, new hospitals (SRCC, Gurugram, Dharamshila) are expected to witness a reduction in losses with ramp up in occupancies. Notwithstanding Covid related impact, the improvement in numbers in the last few quarters is also on the back of judicious case mix identification (more focus on oncology, transplants and non-invasive procedures). We continue to believe in the long term prospects of the company on the back of asset-right model and affordability philosophy. We maintain BUY recommendation and arrive at an SOTP target price of | 585 (earlier | 545) by valuing matured hospitals and Cayman Islands at 16x FY23E EV/EBITDA, new hospitals at 1.5x and other business at 1x FY23E EV/sales.

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