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Steady performance improvement in tough times…

Continued sequential recovery in financial performance amid the pandemic was significantly better than expected. Revenues grew 24.9% QoQ to | 750 crore (down just 4.4% YoY) due to strong recovery seen across mature and new hospitals. On the EBITDA front, margins have already exceeded Q3FY20 levels by 90 bps (up 953 bps QoQ) coming in at a robust 14.0% amid lower employee and other expenditure. Subsequently, EBITDA grew 2.2%, 292.1% YoY, QoQ to | 105 crore. PAT for the quarter was at | 40.8 crore (up 30.1% YoY) against loss of | 3.4 crore in Q2FY21. Delta vis-a-vis EBITDA was due to lower tax outgo.

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, the company 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 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 16.9% in FY20-23E.

Valuations & Outlook

Despite Covid-related challenges, the company posted a substantial improvement in operational performance. Also, in Decembers, the company’s flagship centre revenues reached ~89% of pre-Covid (February 2020) levels. In view of significant near-term headwinds due to reduced overall occupancy levels amid Covid-19, the management has charted a path to reduce costs, increase efficiency and rationalise capex. New hospitals (SRCC, Gurugram, Dharamshila) continue to see a reduction in losses due to 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 and arrive at an SOTP TP of | 580 (vs. earlier | 405) by valuing matured hospitals and Cayman Islands at 16x FY23E EV/EBITDA, new hospitals & other business at 1x FY23E EV/sales.

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