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Strong numbers with sequential ARPOB improvement

About the stock: Narayana Hrudayalaya operates a chain of multispecialty, tertiary & primary healthcare facilities that initially focused on cardiac & renal but expanded to cancer, neurology, neurosurgery, orthopaedics and gastroenterology facilities.

* NHL’s network comprises 19 hospitals (including one managed hospital), four heart centres, 21 primary healthcare facilities (including clinics and information centres) and a multi-speciality hospital in Cayman Islands)

* Revenue mix Q4FY23 – India: | 977 crore; (Bengaluru: 38%, Southern Peripheral: 6%, Kolkata: 27%, Eastern Peripheral: 9%, Western: 5%, Northern: 14%); Cayman Islands: US$29.3 million

Q4FY23 Results: Revenues in line with significant beat on margins.

* Revenues improved 8.3% QoQ to | 1221.5 crore

* EBITDA grew 8.4% QoQ to | 275.8 crore. EBITDA margins remained flat at 22.6%

* Adjusted PAT was up 12.6% QoQ to | 173.2 crore

* ARPOB for Indian hospitals during the quarter came in at | 36986 vs. 35068 in Q3FY23 whereas Cayman Islands ARPOB was flat sequentially at US$6027

What should investors do? NHL’s share price has grown at 46.9% CAGR over the past three years.

* We maintain BUY rating due to 1) expectation of better throughput due to improved 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 NHL at | 990 with SOTP valuation in India & Cayman hospitals at 14x & 14x FY25E EV/EBITDA, respectively, heart centres at 10x FY25E EV/EBITDA.

Key triggers for future price performance:

* Increase in footfalls and improvement in ARPOB are expected to lead flagship hospitals on a steady growth path amid better returns

* New hospitals (Mumbai, Gurugram and Dharamshila) are likely to see an improvement in profit

* Expansion at Cayman Islands in oncology, while being margin dilutive in the 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

* BUY with a target price of | 5460

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