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Brownfield expansion to boost growth

* We have analyzed the capex plans of listed hospital companies focusing on brownfield and greenfield bed additions to assess the impact on margins and their ability to achieve EBITDA breakeven after capacity expansion.

* Over FY25-27, listed hospitals plan to add a total of 16,707 beds (vs. 6,330 beds added over FY20-24) for a combined capex of INR202b. About 52% of those beds would be added through greenfield/inorganic projects and 48% via brownfield.

* Max Healthcare plans to increase its total bed capacity by 84% (3,332 beds) to 7,130 by FY27 for a capex of INR73b. Max will account for 20% of total additions by listed players – the largest expansion over the same period. It is also one of the companies with the highest brownfield expansion (70%). The remaining 30% of beds will be added through greenfield/inorganic expansions. Beyond FY27, it aims to add ~4,500 beds to increase its total capacity to over 11,000 beds.

* We believe that Max’s expansion via a combination of brownfield, greenfield and inorganic will drive strong revenue growth and pave the way for quicker EBITDA breakeven for new beds, thus driving higher operating leverage benefits. We expect a CAGR of 18.4%/16.2%/20.5% in revenue/EBITDA/PAT over FY25-27. We have a BUY rating on Max with our SoTP-based TP of INR1,380.

Hospital sector on expansion spree across India

* Over FY25-27, listed hospitals plan to add a total of 16,700 beds, with 52% allocated to greenfield/inorganic projects and 48% to brownfield.

* They plan to invest INR202b to expand their bed capacity over FY25-27, significantly higher than the 6,330 beds added over FY20-24.

* North/South India regions are expected to benefit the most from this expansion, with planned bed additions of 6,960/5,480.

* Since FY22, hospitals like Max, Aster DM, and KIMS have pursued aggressive acquisitions to enter new markets, while Rainbow, Jupiter, and Medanta have focused on organic expansions.

Max growth to outpace its peers

* Over FY25-27, Max plans to add 3,332 beds, the highest among listed players, which will increase its bed capacity by 84% to 7,130. ? A planned brownfield expansion of ~70% and a quicker breakeven from new beds will drive higher operating leverage benefits.

* Max plans to focus primarily on Tier I cities in North India, with ~82% of its bed additions in this region. The remaining 18% of beds will be added in Western India. The expansion in Tier I cities should drive faster growth in ARPOB and profitability for Max.

* Considering its expansion into Tier I cities, Max is expected to have the highest capex per bed of INR22m (vs. industry average of INR12m).

* Its EBITDA per bed is the highest among its peers at INR7.1m vs. industry average of INR4.7m.

Valuation and view

* We expect a CAGR of 18.4%/16.2%/20.5% in revenue/EBITDA/PAT over FY25-27. We value Max on the SoTP basis (35x EV/EBITDA for hospital business, 26x EV/EBITDA for Maxlab business, 6x EV/Sales for Max@home) to arrive at our TP of INR1,380.

* We remain positive on Max on the back of a robust industry outlook in its focus markets (Delhi, UP, Maharashtra, Punjab, Uttarakhand, Haryana).

* Along with efficient execution, Max is tripling its bed capacity over the next five years, thus providing strong headroom for growth. Reiterate BUY.

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