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Witnessing recovery in developing hospitals

Capex progressing well to cater to future growth

We met with the Global Health (MEDANTA) management to gain a deeper understanding of the business outlook:

* With a strong presence in the north/central region of India, MEDANTA has ~3,440 bed capacity as of 1QFY25. It is ramping up its capacity/capabilities in these regions, especially in Lucknow/Patna/Noida, with plans to add ~500 beds by the end of FY25. Further, it is hiring clinical talents and investing in new technology and equipment.

* Considering MEDANTA’s target to achieve 5,000+ bed capacity over the long term, it is pursuing an ambitious capex strategy and expanding into other regions (such as Mumbai-Oshiwara). ? Given the a) gradual recovery at Lucknow/Patna, b) additional opex due to the addition of new beds, c) expansion into new locations, and d) hiring new clinical talents, we expect MEDANTA to achieve an 11% sales CAGR and an EBITDA margin expansion of 120bp to 26.5% over FY24-FY26.

* Accordingly, we value MEDANTA at 33x 12M forward EV/EBITDA to arrive at a TP of INR1.380, maintaining BUY.

Developing hospitals on the path of recovery

* In FY24, developing hospitals witnessed revenue growth of 34% YoY to INR10b, with an EBITDA margin expansion of 320bp to 32%. However, in 1QFY25, the revenue witnessed a moderate growth of just 3% and a contraction in the EBITDA margin of 300bps YoY to 24.5%.

* This is due to the addition of new beds in both Lucknow and Patna hospitals, along with a volume dip in the Lucknow hospital, thereby leading to a decline in the occupancy ratio in 1QFY25.

* However, MEDANTA has witnessed an uptick in developing hospitals’ volumes over last couple of months, specifically in Lucknow, resulting in a higher occupancy than that in 4QFY24.

* Moreover, with the introduction of schemes such as Ayushaman Bharat at Lucknow and the PPP scheme at Patna, these hospitals are likely to witness further recovery in occupancy to their historical levels gradually.

* Given the fixed cost reflected in the overall opex, the operating leverage is expected to drive better margins going forward, led by the complex nature of treatments under these scheme. This would also limit the dilution of ARPOB. ? MEDANTA is planning to further add 50/100 beds in Lucknow/Patna in FY25. It is also boosting its clinical talent resource at both Lucknow and Patna hospitals. Specifically, it has added medical oncologists in the Lucknow hospital in the recent past.

* Accordingly, developing hospitals are expected to clock an 18% CAGR over FY24-FY26, with a margin expansion of 330bp over this period.

Building capacity for the future growth

* Medanta had 2,823 beds installed by the end of 1QFY25. It aims to grow its capacity to ~3,373 beds by FY25 and 5,173 beds over the longer term.

* The company plans to add 50 beds in Gurugram and Lucknow each, 150 beds in Patna, and 300 beds in Noida by the end of FY25.

* Medanta is implementing efforts to on-board clinical resources at Noida. Given its strong brand equity among doctors, the addition of clinical talent would be easier. Core therapies such as cardiology, GI, and neuro would be the focus for talent hiring in the first phase.

* Given its established residential apartments and close connectivity to the highway, it is estimated to experience 30-35% occupancy in the first year of operations. At a matured level over a period of 2 years, ARPOB can be INR55kINR60k at this site.

* For the Mumbai hospital, Medanta invested INR1.3b on land acquisition. The process to obtain physical ownership of the land and execute the lease agreement is underway. Subsequently, Medanta would spend INR12b (inclusive of land and FSI purchase) over the next 3 years to build a 500-bed hospital.

* Further, Medanta is awaiting regulatory approval to start the construction of its South Delhi project. It would take 3-4 years to build the hospital, with a total investment of INR6b for a 400-bed hospital.

* The green field capex at the Indore hospital has been delayed due to ongoing litigation between previous owner and previous seller. MEDANTA expects the favorable outcome in the next couple of quarters subsequent to which will decide to move forward with construction.

* Moreover, at the Gurugram hospital, the company aims to construct service apartments/guest houses for a total investment of INR2.5b. This will cater to the growing demand of international as well as out-of-town domestic patients for comprehensive healthcare and allied services.

Matured hospitals sustaining the growth momentum

In FY24, matured hospitals delivered a 15% sales growth YoY to INR23b, with a margin expansion of ~300bp. Whereas in 1QFY25, the revenue witnessed a healthy growth of 10% YoY with an EBITDA margin of 24.9%.

* Additionally, matured hospitals are witnessing healthy volume growth of 7-8% on an annual basis. They witnessed strong volume growth over the last 2-3 months.

* Given the level of occupancy, the volume growth may moderate post FY26 due to the limitation of bed addition. However, there is scope for bed optimization, which can drive overall sales/EBITDA for matured hospitals.

* In addition, MEDANTA is investing in new technologies and equipment, which would further drive growth and profitability. Accordingly, we estimate sales at 5% CAGR over FY24-FY26, with a 30bp margin expansion over this period.

Valuation and view

* MEDANTA recorded a robust 59% CAGR earnings over FY20-FY24, led by superior execution. We expect a healthy 18% earnings CAGR over FY24-FY26. Given that MEDANTA is implementing efforts to further scale up Lucknow/Patna, expand its bed capacity, and add clinical talent, we witness moderate earnings in FY25. However, we expect robust earnings growth from FY26 onwards.

* We value Medanta at 33x 12M forward EV/EBITDA to arrive at a TP of INR1,380. We reiterate BUY on the stock.

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