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Shalby Ltd (‘Shalby’) leader in Arthroplasty in India (market share of 15%), remains an under researched and under owned Investment Idea. Its best in class EBITDA margins even with lower occupancy and lower Capex/bed is a testimony of its cost and capital efficient operations. It remains almost net debt free even with the recent increase in its bed capacity by more than 55% and an implant facility acquisition. The newer hospitals (33% of operating beds) to lead EBITDA expansion on account of increased occupancies and asset maturity. Recent Implant facility acquisition provides massive synergies to Shalby with estimated annual savings of INR >11cr. Strong management bench-strength can help turnaround the International Implant business. We thus Initiate Coverage on Shalby with a BUY rating and a target price of INR 320, 29x P/E FY23 earnings, which is an upside of 65% on CMP.

2x EBITDA expansion to be led by efficient operations and operating leverage from maturing hospitals

* Shalby’s relentless focus on cost efficiency has led to superior EBITDA margins vs. peers even with lower occupancy levels.

* It increased its bed capacity from 1,265 beds in FY17 to 2,012 beds in FY18 as it added 5 new hospitals to its portfolio. The new portfolio accounting for 33% of operating beds however contribute 15% to total EBITDA.

* With increasing occupancy and maturity of these assets, new hospitals to be the biggest driver of EBITDA expansion.

Implant acquisition at excellent value brings massive synergies for Shalby

* Shalby paid USD 11.45mn for the Implant facility in the US, which in our view remains an attractive acquisition given the business generated sales USD ~18mn in FY18 with peak sales potential of USD 40-50mn.

* Shalby is the largest player in Arthroplasty in India, consuming >18,000 implants by itself. Thus backward integrating into own implants should have massive synergies (more than INR 11crs as per us)

Massive earnings growth story at compelling valuations

* Shalby is one of the most efficient hospital operators with sufficient growth capacity. Moreover, despite the mega expansion in FY17 it remains almost net debt free. Recent Implant acquisition and strengthened leadership a key catalyst for growth.

* We initiate coverage on Shalby with BUY rating and target price of INR 320, which is 65% upside on CMP. At our target price, Shalby is available at 29x FY23E PER; on the CMP it trades at 19x FY23E PER.

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