Buy Narayana Hrudayalaya Ltd For Target Rs.855 - ICICI Direct
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Strong overall performance; focus on new capex…
About the stock: Narayan a Hrudayalaya operates a chain of multispecialty, tertiary & primary healthcare facilities that initially focused on cardiac & renal but expanded to cancer, neurology, neurosurgery, orthopaedics & gastroenterology facilities.
* NHL’s network comprises 21 hospitals (including two managed hospitals), four heart centres, 18 primary care facilities (including clinics and information centres) and a multi-speciality hospital in Cayman Islands)
* Revenue mix FY22 – India: | 2965.5 crore; (Bengaluru:31%, Southern Peripheral:7%, Kolkata:27%, Eastern Peripheral: 5%, Western: 16%, Northern: 13%); Cayman Islands: US$91.9 million
Q2FY23 Results: NHL reported strong numbers with beat on margins.
* Revenues grew 10% QoQ to | 1142 crore, as hospitals in India grew 11.2% QoQ followed by Cayman Island, which grew 28% QoQ
* EBITDA grew 26.9% QoQ to | 243.7 crore. EBITDA margins grew 277 bps QoQ to 21.3%
* Adjusted PAT increased 52.7 % YoY to | 169 crore
What should investors do? NHL’s share price has grown by ~2.5x over the past three years (from ~| 290 in November 2019 to ~| 738 levels in November 2022).
* We maintain BUY due to 1) pick-up in occupancy levels and ramp-up in new hospitals, 2) consistent performance at Cayman Islands and 3) judicious plan to expand at existing hospitals nearing full utilisation
Target Price and Valuation: We value Narayana at an SOTP of | 855 by valuing matured India & Cayman hospitals at 15x & 14x FY24E EV/EBITDA respectively, heart centres at 10x FY24E EV/EBITDA and other business at 1x FY23E EV/sales.
Key triggers for future price performance:
* With Covid almost completely waning, increase in footfalls is expected to lead flagship hospitals on a steady growth path amid better returns
* New hospitals (SRCC, Gurugram, Dharamshila) are likely to see reduction in losses and turn profitable in near term with ramp up in occupancies
* Improvement in numbers on the back of judicious case mix identification (more focus on oncology, transplants and non-invasive procedures)
* Expansion at Cayman Islands in oncology while being margin dilutive in near term is likely to provide significant additional operating leverage
Alternate Stock Idea: Apart from NHL, in our healthcare coverage we like Apollo.
* Apollo Hospitals is an integrated healthcare provider undergoing an optical transformation towards creating an omni-channel healthcare platform while turning the new hospitals profitable on the back of a judicious case mix
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