Reduce Narayana Hrudayalaya Ltd For Target Rs.380 - Yes Securities
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Result Highlights
* Rebound continue in Q4 with 10% growth in domestic business though sharp deceleration in H1 FY21 lead to 23% revenue fall in FY21
* Q4 margin jumped yoy on low base of last year and better quality of revenue – higher ARPOB and longer ICU days
* Company unlikely to incur any significant capex in India; Cayman onco addition to drive revenues beyond FY23
Our view:
Q4 FY21 quality of revenues improved as government patients stayed away and ARPOB increased yoy in Q4 and FY21. We reckon several moving parts would pull in differing directions casting an impact on FY22 earnings. As pandemic eases, leading to a revival in international patient inflow, this could lead to a decline in Cayman Island margin with the extent depending on pace of patient inflow. In domestic business, the return of government patients and lower ICU bed usage (especially compared to H2 FY21) would adversely impact mix and ARPOB; on the other hand, ARPOB would get a leg up as Mumbai and Gurugram hospitals continue towards breakeven status.
Hence, we have cut FY22 estimate by 15% and expect a more normalized year of operations in FY23 with 1) Cayman Island margin above FY20 base 2) three new hospitals break even and 3) existing hospitals margin move to 25%. This results in a rather sharp 25% jump in FY23 EPS estimate. We raise our target EV/EBIDTA multiple to 14x from 12x earlier with revised TP Rs380 (earlier Rs325) on increased earnings optimism in FY23 and receding capital allocation risk in India. However, we reckon extant valuation of over 18x EV/EBIDTA adequately factors in the growth in FY23.
Moreover, stock trades at a premium EV/EBIDTA to formulation players with strong branded presence in India who are leaders in chronic/acute categories with a more robust and sustainable ROE/cash flow generation business. Another risk to extended valuation could be government clamp down on specific procedure costs – not in the near term but over a medium time frame. We continue to like the franchise, but lower valuation would be more palatable. Reduce stays.
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