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Shalby Ltd (‘Shalby’) came out with its Q2FY22 results which reported sequential margin degrowth on the back of implants businesses losses and reduced covid related tailwinds (16.2% vs 25.5% for Q2FY21 vs 20% for Q1FY22). Implant business reported USD 1mn revenue in Q2FY22, guidance for FY22E and FY23E at INR 50crs and INR 100crs respectively. First Ortho Franchise started in Udaipur, expected to open 50 franchises across India over medium term. The newer hospitals (892 beds) reported ~12% EBITDA margins with 37% revenue contribution while mature hospitals (228 beds) reported ~37% EBITDA margins with 29% revenue contribution. Ramp-up of occupancy in newer hospitals will improve the overall EBITDA margin profile. Key optionalities including the Implants business and the franchisee business are yet to play out. We retain a BUY on Shalby with a target price of Rs280, which is 81% upside on CMP. At our target price, Shalby is available at 28x FY23E PER; on the CMP it trades at 16x FY23E PER.

Q2FY22 performance led by strong momentum in non-covid surgeries; Implants losses drag bottom line

* Q2FY22 performance was led by higher non-covid surgery counts (~6190 vs 5000 pre-covid levels). Arthroplasty and Orthopedics contributed to ~55% of total sales. This may have an element of bulking up, being elective surgeries.

* Consolidated margins impacted on account of Implants business losses which is likely to continue in H2FY22 and reduced covid related tailwinds. Higher share of Arthroplasty and Orthopedics surgery remains key for better margins.

Implant business scale-up key for medium term profit growth

* Implant business reported sales of USD 1mn in Q2FY22 with an EBT loss of USD 0.7mn. With scale up of volumes on account of core markets including North America, Japan and Latam markets and entry into high growth markets in Asia will lead to better margins driven by operating leverage

* Guidance: Revenue target for FY23E is INR 100crs and INR 45 to INR 50crs for FY22E

Multiple optionalities and attractive valuations

* We believe key optionalities including the Implants business and the franchisee business are yet to play out. Implants to be a significant contributor to the earnings growth with new strategy and leadership team in place.

* We retain a BUY on Shalby with a target price of Rs280, which is 81% upside on CMP, which has been reduced from INR 320 on account of estimate revision. At our target price, Shalby is available at 28x FY23E PER; on the CMP Shalby trades at 16x FY23E PER

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