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Growth levers in place | Initiate coverage with a BUY rating

* Global Health (MEDANTA) is a leading tertiary care service provider with established presence in North and East India. With an aim to provide specialized care in underserved densely populated areas, MEDANTA has built its hospital network in Gurugram, Indore, Ranchi, Lucknow, Patna, and Noida (upcoming). Within a span of 15 years, it has scaled up its bed capacity to nearly 2,700 and intends to add more than 1,300 beds over the next three years.

* Through a team of senior clinicians and nurses, MEDANTA has been able to cater to the requirements across therapeutics, thus making it a preferred choice among an extensive patient base. The company delivered 17%/35%/47% revenue/EBITDA/ PAT CAGR to reach INR27b/INR6.2b/INR3.3b over FY19-23.

* We expect the momentum to sustain with 14%/17%/26% revenue/EBITDA/PAT CAGR over FY23-25 to reach INR35b/INR8.5b/INR5.2b. This will be led by: a) higher volume of patients being treated at new hospitals, b) scale-up in international patient flow, and c) improvement in ARPOB backed by superior payor mix/case mix.

* Strong demand in cities where MEDANTA is present makes it imperative for the company to add beds. MEDANTA is already on track to scale-up its capacities at Lucknow and Patna.

* Considering its strong business prospects and surplus cash (INR5b; FY23), we value MEDANTA at 23x EV/EBITDA (10% premium to the sector due to its size/ profitability) to arrive at our TP of INR840. Initiate coverage with a BUY rating

Clinical excellence driving robust operating performance

* MEDANTA has five hospitals in operation. Of these, three are mature hospitals (Gurugram, Indore and Ranchi – with combined bed capacity at 1,766; 65% of total), while the two new hospitals at Lucknow and Patna have a combined bed capacity of 959 (35% of total) at end-1QFY24.

* Aided by strong 13%/15% CAGR in in-patients (IPD)/Outpatients (OPD) flow and 7% ARPOB CAGR, MEDANTA was able to post 17% sales CAGR over FY19-23.

* Particularly, its revenue/EBITDA CAGR from matured hospitals stood at 12%/23% over FY20-23 to reach INR20b/INR5b. Moreover, strong goodwill created by the timely opening of Lucknow hospital during Covid-19 helped MEDANTA breakeven in the first year of operations. Robust demand for healthcare services has also enabled breakeven in Patna in its first year of operation.

* We expect MEDANTA to report 6%/31% revenue CAGR for mature/developing (Lucknow/Patna) hospitals over FY23-25 to reach INR23b/INR13b.

Payor mix/case mix to propel ARPOB growth further

* Mature/developing hospitals posted 6%/8% CAGR in ARPOB to INR60k/INR56k over FY20-23.

* Payor mix optimization resulted in a surge in revenue from insurance-based patients to nearly 25% in 1QFY24 from 18% in FY19.

* Similarly, MEDANTA’s case mix has been skewed towards high-specialty areas with cardio, onco, and neuro contributing 50% to IPD revenue.

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