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Strong FY25 outlook

Margin miss in Q4; outlook remains positive

Shalby (SHALBY IN) Q4FY24 revenue came in line with our estimates but lower margin caused EBITDA to miss our estimates by 14%. The margin miss was primarily due to higher cost, including staff incentives in Q4; this does not affect our forward profitability estimates significantly. In the hospitals segment (90% of revenue), occupancy was up 80bp YoY despite addition of lower occupancy Sanar Hospital at Gurugram, which was recently acquired. Overall revenue was up 22.7% and EBITDA 51.5% YoY.

Sanar acquisition earnings accretive; more expansion on the anvil

SHALBY recently acquired Sanar Hospital, a high-end proceduresfocused medical facility that targetsinternational patients. The valuation at ~2x EV/revenue seems reasonable. We expect the acquisition to be earnings accretive in FY25. The franchisee center at Rajkot is set to open later in Q1FY25. As the Nashik hospital is seeing a delay, we are removing it from our estimates. Plans are on track for the Mumbai hospital; we expect commissioning in mid-FY28.

High EBITDA growth to sustain

While we expect softening in profitability for the hospitals sector in the next 2-4 quarters, SHALBY may be an exception, with continued industry-beating EBITDA growth. We expect ~30% EBITDA growth in FY25E, partly led by the Sanar acquisition, and followed by sustained mid-teen growth.

Medium-term optimism in the implant devices space

Management expects a growth momentum pickup in the implants business; it has set a target for USD 16mn revenue in FY25, up ~50% on low base. While we have yet to build in a major ramp-up in the business, it can add to growth and profitability.

Valuation: reiterate Buy with a TP of INR 364

We reduce our FY25E core EPS by 2% but raise our FY26E core EPS by 3% and introduce FY27 estimates. SHALBY currently trades at 27x FY25E core P/E. Our TP of INR 364 is based on 30x FY26E core P/E plus cash per share. Worsening demand in the hospitals space is a key risk

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