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Sanaar losses continue

Shalby (SHALBY IN) reported poor Q3FY25 results, significantly below our expectations. Revenue came in 4% higher, but poor margins meant EBITDA missed our estimates by 31%. The company reported a loss at the PAT level as income tax exceeded consolidated PBT. Losses at the recently-acquired Sanar hospital in Gurgaon was the major culprit. Some margin erosion in the legacy business contributed as well.

SHALBY mentioned some one-off expenses and expects margins to improve in Q4. We reduce our FY25E EPS estimates by 59%, mainly to reflect very high consolidated tax rate and partly to reflect margin weakness. We also reduce FY26E and FY27E EPS in the range of 13-22%. So, we lower our TP to INR 252 from INR 270. We retain Accumulate as we believe that much of the weakness is in the price.

Glitches in Sanar operations:

SHALBY recently acquired Sanar Hospital, a high-end procedure-focused medical facility that targets international patients. The facility has been running low on occupancy, posting EBITDA losses. This has worsened in Q3 as there were exits by three key doctors. Asper SHALBY, it has recruited new doctors from top institutes to fill the gaps and guided for recovery in occupancy in the next two quarters.

Core business hit by one-off costs:

Margins in SHALBY’s legacy operations were hit by certain one off costs, including costs related to hosting of a major industry event. The topline continued to do well, up 13% YoY. SHALBY expects the margins to recover in Q4. SHALBY targets to double the topline in 4-5 years in the existing facilities, ramping up capacity utilization. The Mumbai Santacruz hospital project is also progressing.

Optimistic on Implants segment:

Revenue from the Implants business in Q3FY25 was up 25% YoY, tad below our expectations. However, the business reported a profit at the EBITDA level, after many quarters of losses. SHALBY is optimistic on the prospects of this business globally. Expect growth to pick up in multiple markets.

Retain Accumulate with a lower TP of INR 252:

We reduce our FY25E EPS estimates by 59%, mainly to reflect very high consolidated tax rate and partly to reflect margin weakness. We also reduce FY26E and FY27E EPS in the range of 13-22%. SHALBY currently trades at 35.5x FY26E core P/E and 13.1x FY26E EV/EBITDA (pre-IndAS). We lower our TP from INR 270 to INR 252, which is 25x FY26E core PE. We retain Accumulate as we believe that much of the weakness is in the price.

Worsening demand in the hospitals space and slower ramp-up in occupancy in the recently-acquired Sanar facility are key risks to our call.

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