Narayana Hrudayala - Q2FY21 Result Update - YES Securities

Narayana Hrudayala (Q2FY21) - REDUCE (Target Rs270, Downside 18%)

Our view: Cayman island facility is putting solid performance especially on margin front as lockdown ensures local population cannot venture out of the island for treatment and also restriction on international inflow (which is at much lower rates). Hence, we raise FY21 estimates driven by improved Cayman facility EBIDTA which, though, is likely to mean revert from June next fiscal. We factor in recovery in our estimates with margin at ~16% on consol basis and EPS of Rs10.3 (unchanged from last update) even as even a ~150bps miss on mature hospitals margin (to 23% vs assumed 24.5%) can lead to ~14% decline in FY22 EPS - a risk which is not adequately factored in our view. While we have always like NH as a franchise with cleaner structure, we reckon better entry points can prevail. Reduce stays with unchanged TP of Rs270. Why Not SELL - We highlight the sensitivity of recovery to FY22 EPS which makes us cautious (As reflected in EV/EBIDTA multiples) compared to consensus even as we do not doubt the scalability of franchise. Hence no firm sell call on the counter.

Narayana Hrudayala Q2 FY21 call highlights

- Tier 2 facilities at Shimoga and other Karnataka peripherals supported growth

- Remain optimist on Q3 despite it being a seasonally moderate quarter due to festivals; with regions going in to lock down after a second wave so will optimize accordingly

- Do get one-off procedures from international patient; land border is open with Bangladesh but big numbers won't be seen till flights resume which may be anytime soon

- Unlikely Delhi will go in to lockdown but rising COVID cases needs to be watched

- Will take some time from payors to come to office and process receivables due to NH; don't think it will result in bad debts

- Higher consumables due to COVID care and increase in cardiac scope

- Mumbai SRCC and Gurugram hospitals break even postponed to FY21; Gurugram more like H1 and Mumbai to H2 FY21

- Cayman numbers might be on higher side given that people inside Cayman have no choice; ideally would want borders opened so people can come from outside

- Cayman to be under lockdown till June next year so international patients may take time to revive

- Adjusted Cayman facility EBIDTA at US$8.5mn is pre-IND AS adjustment; about US$0.12mn is the monthly IND AS adjustment

- 150% increase in Sep EBIDTA compared to Feb 20 in Cayman facility

- Will look at B2B diagnostic business for captive patients but not retail facing as that requires capital

Shares of Narayana Hrudayalaya Ltd was last trading in BSE at Rs.333.4 as compared to the previous close of Rs. 328.3. The total number of shares traded during the day was 4202 in over 671 trades.

The stock hit an intraday high of Rs. 334.5 and intraday low of 301. The net turnover during the day was Rs. 1375403.

Source : Equity Bulls

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