Reduce Max Healthcare Institute Ltd For Target Rs.988 By JM Financial Services
We met with management of Max Healthcare Institute (Max) represented by CFO Mr Yogesh Sareen. The CFO reiterated that Max remains focused on RoI as a key criterion while evaluating growth opportunities. He also mentioned this approach may lead to some dilution in operational metrics in the near term, but that would be secondary as long as the company achieves its targeted return on capital. Max intends to add about 1,700 beds over the next two years, which will be a key growth driver, while the base business’s ARPOB is expected to hover within 6–8%. The CFO argues the endeavour will be to maintain EBITDA margins of 25–27% despite upcoming bed additions while revenue growth is likely to be about 15% or higher. The institutional business mix may take time to improve, particularly with potential war-related risks impacting international patient flows. We continue to maintain our estimates for Max, which are broadly in line with the company’s expectations. That said, we believe that street expectations are meaningfully higher and could pose downgrade risks. Although we like the company due to its strong execution and industry-leading operational metrics, elevated valuations and the risk of earnings downgrades leave limited room for a positive stance on the stock. Maintain REDUCE.
* Growth strategy: Management alluded that expansion outside the Delhi NCR may lead to dilution in EBITDA/bed and other operational metrics. However, the primary focus is on generating high RoCs in new businesses rather than concentrating solely on these operating metrics. The company is able to raise loans at interest rates of 7–8%, so the objective is to deploy capital into assets that generate returns significantly higher than its cost of capital. So far, the business has executed its growth strategy well in terms of generating strong returns on investment, with Lucknow and Nagpur being notable examples
* Bed additions and expansion pipeline: The approach is to put in beds that can be utilised in the near term, adding one floor at a time when possible. In greenfield projects, however, it typically needs three—four floors to start operations because hospitals require multiple services to function effectively. The slower addition this year has largely been due to delays in regulatory approvals rather than a deliberate strategy to stagger bed additions, and this approach will continue. In the current quarter, the business will add only 200 beds. The remaining 300–400 beds will be added in 1QFY27E. Beds can only be added wherein occupancy certificates have been received. This quarter, the Nanavati balance will come through, and Mohali will also be added. The Smart facility may come on stream at the end of this quarter or in the next. Over the next two years, around 1,700 beds are expected to be added.
* Debt requirements: Since bed additions will be higher over the next two years, the company will raise additional debt. Loans or credit lines for Gurgaon amounting to INR 4–5bn and an INR 5bn line for Noida are already in place.
* Impact of new hospitals on ARPOB: Overall ARPOB growth has been affected by the addition of new hospitals. However, ARPOB growth for the base business remains at 7–8%, which the management believes is healthy enough to support cost escalations. The lower overall growth is primarily due to new assets, and this is expected to improve over time. Revenue contribution from new hospitals has increased from 7% a year ago to 19% currently
* Insurance and payor mix impact: In the last quarter, the payor mix was not optimal. It should improve this quarter, although dramatic changes are unlikely. The company has made a few bold decisions in this regard. International revenues were also impacted this quarter, mainly from the Middle East and African countries. As a result, Max has limited ability to quickly reduce institutional beds. Typically, a 30-day notice is required to reduce exposure, so adjustments cannot happen immediately.
* Immigration business: This business earlier generated about INR 1.5bn in revenue with margins of about 75%. It has now dwindled to about INR84mn and is unlikely to scale up significantly due to the broader trend of deglobalisation.
* Nanavati: Post-expansion, margins at Nanavati can expand to about mid-20s on a net basis. However, they are unlikely to go much higher because revenue has to be shared.
* Lucknow: The hospital’s EBITDA has surged ~4x since the acquisition, with margins in-line with peers in the region. This has brought the valuation down to 7–8x from about 25x at the time of acquisition. By FY26E, Lucknow unit is expected to be 500-bed facility, up from 410 currently. The oncology department started recently and shall gradually ramp up.
* Noida: Due to competition, hospital costs are relatively high. Doctors were underutilised for some time. Earlier, the business relied on referrals, but have stopped that practice, which led to a temporary decline in revenue. Now revenues have returned to their original levels. Overall EBITDA has grown 30%. The hospital had 377 beds at the time of acquisition and has now reached around 500 beds, with potential to expand to 800–900 beds.
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SEBI Registration Number is INM000010361
