Buy Rainbow Children's Medicare Ltd for the Target Rs.1,680 by Emkay Global Financial Services Ltd
Impacted by seasonality, Rainbow’s Q1FY26 revenue grew 7% YoY, missing street’s expectations/our estimate by 2%/1%, respectively. Operating performance, however, was satisfactory, with EBITDA growing 11% YoY (margin expansion of 100bps) as losses in new units contracted (Sarjapur unit reached breakeven in Q1). Given the robust ramp-up in new hospitals (OBD+20%; ARPOB+10%) and traction in new verticals (eg: IVF), we expect revenue/EBITDA CAGR of 15%/17% over FY25-28E, in line with the management’s upbeat guidance for a high-teen revenue CAGR. Improving profitability at new units should help offset the expected drag from Rainbow’s staggered bed expansion plans over FY25-28E; this would result in a flattish margin, in our view. The strong net-cash balance sheet (Jun-25: ~Rs7.4bn), robust cash conversion, and healthy return ratios provide comfort on valuations. Factoring in the Q1 miss, we cut FY27/28E revenue by 3%/2%, respectively, while maintaining BUY. Our Jun-26E TP is increased by 5% to Rs1,680 on rollover, based on 28x Jun-27E pre-IndAS EV/EBITDA (27x earlier).
Mature portfolio continues to drag the performance Rainbow reported topline growth of 7% YoY (Rs3.5bn), led by ARPP growth of 8% YoY, though partially offset by a 2% decline in patient volumes. EBITDA stood at Rs1bn (up 11% YoY), with margin expansion of 100bps YoY on new facilities breaking even and an improving case mix (higher-value quaternary care). At mature facilities, revenue rose 2% YoY, while OBD declined 11%; ARPOB rose 15% YoY, with occupancy at 44%. At new facilities, revenue grew 31% YoY, OBD/ARPOB rose 20%/10% YoY, with occupancy at 32%. The Q1 EBITDA margin (pre-IndAS) came in at 23%, up by 110bps YoY. PAT came in at Rs535mn, up 35% YoY. The payor mix has been stable at 48%/52% for cash/insurance patients (flat YoY). Q1 capex was Rs415mn.
Earnings call KTAs
1) The management has guided for revenue growth in the range of late-teens to 20% in FY26, on a likely healthy trend in the next 3 quarters after a seasonally soft Q1.
2) The company is confident of sustaining its ARPP growth trajectory of 6-7%, driven by insurance hikes, with ALOS guided at 2.6-2.8.
3) Project timelines: Rainbow largely retained its bed addition timeline – 100 beds at Rajahmundry by Aug-end (delayed from Q1); Electronic City (90 beds), and Hennur (60 beds) to be commissioned by end-Q2; Coimbatore hospital (130 beds) is expected to be commissioned by end-FY27, while the 2 upcoming hospitals in the NCR (450 beds in total) are likely to be commissioned in Sep-27.
4) The company is in advanced discussions regarding signing a 150-bed hospital in Pune, entailing capex of Rs8mn per bed (asset-light; expected to be commissioned in 2.5 years). It is also exploring expansion in the Northeast.
5) The management highlighted that Q1 performance was impacted by seasonality in pediatrics (medical cases), while tertiary and quaternary care segments were steady, resulting in higher ARPP.
6) The recently acquired Prashanthi Hospital in Warangal will be consolidated in Q2.
7) Competitive intensity in birthing remains elevated, but the management has not seen any major competitors, thus gaining market share.
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