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Margin risks not factored; Reduce stays

Our view

Cayman Island hospital continues to clock better than expected numbers especially on margin front with 3Q margin in excess of 40%. A look at the past numbers shows the importance of Cayman in boosting EBIDTA – for instance, Cayman now accounts for ~47% of 9m FY22 EBIDTA as compared to 24% in 9m FY20 prior to Covid. Indeed, bulk of EBIDTA boost since FY20 has been driven by sharp improvement in Cayman margin from 24% to >40% (beginning Q2 FY20), thereby pushing domestic business to play catch up. We would have preferred domestic business to be the key driver of margin improvement on a blended basis. Domestic business does have a few margin drivers (albeit gradual) in the form of increased onco mix towards 20% (from 13% currently) due to addition of onco blocks and radiation oncology at several domestic hospitals. However, it is not clear if Cayman margins at >40% are sustainable, even assuming for addition of new oncology block. While growth can be in high single digit from better volumes (due to refurbishment) and improved utilization, our concern stems from risks to margin. Accordingly, while we bump up FY22 estimates (consensus is likely too, given where it is prior to 3Q results), our FY23/24 estimates factor in some of the margin risks and are below consensus. Retain Reduce based on unchanged 13x EV/EBIDTA (denominator increasingly driven by export geography) with marginally revised TP Rs460.

Result Highlights

Revenue was down by 2%/28% QoQ/YoY to Rs9,596mn

India revenues were up 62% YoY with all cluster performing well. Operating revenues in Cayman increased from US$19.1mn to US$24.9mn

Gross margin increased by 63bps QoQ to 75.4% and EBITDA margins were also up 27bps to 18.2%. This increase might be due to reduced Covid related revenues sequentially and a more normalized patient mix as reflected in pre Covid quarters as also yet again strong Cayman performance

Valuations

While we bump up FY22 estimates (consensus is likely too, given where it is prior to 3Q results), our FY23/24 estimates factor in some of the margin risks and are below consensus. Retain Reduce based on unchanged 13x EV/EBIDTA (denominator increasingly driven by export geography) with marginally revised TP Rs460

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