Buy Krishna Institute of Medical Sciences Ltd For Target Rs.2,855 By JM Financial Services
KIMS delivered a solid performance this quarter, reporting revenue growth of 14% (2% beat) and EBITDA margins of 26.1%, which expanded by 90 bps YoY. This growth was driven primarily by a 9-10% increase in revenue from the core regions of Telangana and Andhra, while revenues from Sunshine Hospitals surged 20% and Nagpur Hospital saw a notable 33% revenue increase during the period. The company's performance was bolstered by a 7- 10% YoY growth in IP & OP volumes, complemented by a reduction in ALOS. Additionally, ARPOB jumped by 21% this quarter. Despite these gains, overall occupancy across the hospital chains remains relatively low at ~ 50%. To address this, KIMS plans to add more doctors and specialties in many of their units. Price hikes, which are yet to be implemented, will also drive margins. However, improvement of margins in core regions will be offset by the planned opening of four new hospitals in Nashik, Thane and Bangalore for FY25. Looking ahead, we anticipate KIMS will continue to be the fastest-growing hospital chain in India, with projected revenue and EBITDA CAGRs of 26% and 27% over the next three years. The company's entry into high ARPOB regions and its strategies to enhance the case mix in Andhra and Telangana are expected to improve EBITDA per occupied bed, which should positively influence the valuation, which remain at 24% discount to peers. We maintain a BUY rating with a target price of INR 2,855, projected for June 2025.
* ARPOB led growth: KIMS reported a strong quarter with 14%YoY growth. This was driven largely by ARPOB growth of 21% whilst volumes were steady – IP volume growth 7.5% and occupancy fell to 49.8% (vs. 52.9% YoY). The reduction in occupancy was primarily in their core geographies AP-Telangana. The company reported an improvement in ALOS at 3.62 (vs. 4.41 YoY), primarily through better management in the AP cluster, and slight improvement in case and payor mix. Management believes going ahead they can sustain these ALOS numbers. The growth in AP-Telangana will be supported by capacity additions, doctor hires and addition of new specialties such as Mother & Child and cancer.
* Margin outlook: The current margins may sustain over the near-term as Nashik losses are offset by Sunshine and Nagpur ramp-up. The margin delta is expected once 4 new hospitals are commissioned and start contributing meaningfully from 2HFY26 or early FY27, in our view. Price hikes could be a key lever.
* Investment cycle in full-swing: The company is aggressively expanding bed capacity. In Telangana, KIMS is adding 500 beds in Kondapur and plans to shift to a new facility for Secunderabad leading to net addition of ~200 beds over the next 3 years. In Andhra, KIMS is adding 50-100 beds in across key facilities over the next 24 months along with cancer and M&C specialties. Nagpur is trending at 17%+ margin and is improving, during this quarter there were certain one-off expenses, excluding these margins were ~21%. Nashik’s doctor on-boarding is complete and the plan to commercialise with 70-80 beds in second half of August. They will scale up operations as occupancies rise.
* Insurance-led hikes to drive ARPOB growth: Contracts are expected to get renewed this year and based on past experience, it is typically 10-12% higher. GIPSA was supposed to happen in Nov last year and the management is eagerly waiting for the same. It will be a good 20-30% price hike and it follows a 4-5y cycle. Once announced, it will take 6-9m for implementation due to bilateral negotiations. The company is adding cancer, M&C and rehab centres in many of their hospitals which should further improve case mix.
* Gearing up for a Karnataka entry: The company has roped in Mr. Sreenath Reddy, previously Group CFO of Aster DM to strengthen their roster for upcoming venture in the Karnataka (KA) cluster. The management announced that Dr. Nitish Shetty, former CEO Aster DM is set to join KIMS as the Head of the KA cluster. They will be awarded equity in the Karnataka business in the in exchange for a land parcel (valued at fair market price) in Sarjapur – where KIMS plan to build a large health city over time. The company is on track to operationalize the two hospitals in Karnataka in the next 2-3 quarters.
* Expanding footprint in Vishakhapatnam: The company has acquired the Queen’s NRI hospital located in a premium neighbourhood in Visakhapatnam. The hospital currently clocks revenue of INR 650-700mn and management is confident they can scale this up to INR 2.5-3bn over the next 3-4 years. Margins can meaningfully improve from current 8%. While no meaningful medical costs are to be incurred, the company will renovate the facility (INR 250-300mn) to upgrade facility. They plan to improve the payor mix and shift scheme patients to their existing facilities in Visakhapatnam.
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