Buy Sagility Ltd for the Target Rs.55 by Emkay Global Financial Services Ltd
We initiate coverage on Sagility with BUY and 12M forward TP of Rs55, at 18x Sep-28E adjusted EPS, implying an upside of 20%. Sagility is a niche player in the tech-enabled healthcare operations vertical, focused on critical, core, nondiscretionary, and recurring healthcare operations, with ~90% of revenue from US payers. Its deep domain expertise, long-standing client relationships, and strategic positioning with payers provide a sticky revenue base and client retention. At the same time, rising healthcare costs, regulatory complexity, and increasing pressure on payers to improve efficiency should support continued outsourcing, in our view. Against this backdrop, we see multiple avenues for sustained low double-digit growth on the back of
1) deeper penetration of existing accounts
2) expansion into adjacent workflows
3) cross-selling across services
4) mid-market payer expansion
5) M&A-led capability and client additions. Management expects a low double-digit organic growth and 24-25% adj EBITDAM in FY27. Its medium-term low-to-mid-teens organic growth target factors in ~1.5-2.0% annual revenue deflation related to pricing and productivity, with continued volume growth and service expansion needed to offset these headwinds. Considering the aforementioned factors and strong execution, we expect the company to log ~15% revenue CAGR over FY26-29E, with steady EBITM expansion to 18.1%, driving ~20% EPS CAGR.
A non-discretionary end-market that compounds above-GDP through the cycle
Sagility operates in a healthcare ecosystem in the US, where demand is driven by an aging population, prevalence of chronic diseases, rising healthcare utilization, and increasing administrative complexity, rather than discretionary enterprise spending. US NHE is projected to see 5.4% CAGR over CY25-34, above the 4.1% nominal GDP growth, thus boosting healthcare spending from 18.0% to 20.6% of GDP. Such sustained growth, coupled with continued payer focus on cost efficiency and operational complexity, supports a structural opportunity for Sagility to capture a greater outsourcing spend.
The M&A troika Adding scale, capabilities, and strategic depth
Sagility has pursued a targeted M&A strategy to strengthen capabilities, expand its client base, and deepen its presence across adjacent healthcare workflows – Devlin Consulting (acquired for ~$40mn) added payment integrity, BirchAI (~$13mn) strengthened Gen AI capabilities, BroadPath (~$58mn) expanded mid-market payer exposure along with ~30 client groups, and CareSeed ($30mn) added HEDIS, quality analytics, and Medicare Advantage capabilities along with ~26 new client groups.
We initiate coverage with BUY; earnings quality improves ahead of the multiple
We expect the company to deliver rupee revenue/earnings CAGR of ~15%/20% over FY26-29E. We initiate coverage on Sagility with BUY and TP of Rs55, at 18x Sep-28E adj EPS. The stock is currently trading at ~17x Sep-27E adj EPS, at ~6%/20% discount to FSOL/ECLX valuations.
Key risks:
1) Slowdown in healthcare spending.
2) Insourcing by key clients.
3) Potential regulatory changes around Medicare/Medicaid plans.
4) Higher than anticipated deflationary impact from the progress in AI.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
