Downgrade to ADD on Narayana Health - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Narayana Health (NH) Q4 results were strong with EBITDA at INR1.4bn (+48% YoY, +34% QoQ) vs. our expectation of INR1.1bn. The beat was largely driven by strong recovery in India business (pick-up in elective surgeries, lower COVID contribution) and continued momentum in Cayman Islands (40.5% EBITDA margins vs. 25% in FY20). We expect recovery trends to continue in India (barring Q1FY22) with flagship units (40%+ of revenues) growing in high single digit (on a low base), other mature units growing in low double digits and new units (ex-SRCC) turning profitable by FY23. NH expects moderation in Cayman Islands margins as travel restrictions ease. We increase our EBITDA estimates for FY22/23e by 2%/8% to factor in healthy recovery trends in India. However, at the CMP of INR505/sh., the stock is trading at ~15x FY23e EV/EBITDA, which limits the scope of further re-rating. Downgrade to ADD.

Key operating parameters witness improvement: NH's India revenue grew 13% YoY and 12% QoQ to INR8.4bn, driven by strong recovery across regions (at or above pre-COVID levels). Key operating parameters improved in Q4 as occupancies saw steady improvement (55%, +277bps QoQ, pick-up in electives), ARPOBs were at an all-time high at INR11mn (+11% YoY, +8% QoQ, high-end procedures) and ALOS declined to 4.8 (vs. 5.1 days QoQ, lower COVID contribution).

Mature units post strong recovery, new units lag: Mature units' revenues grew by ~10% YoY/18% QoQ. With decline in COVID cases (overall contribution down to ~3% in Q4 vs. 14% in Q3), the mature units' margins reverted to 20%+ levels (+74bps YoY, +382bps QoQ), aided by recovery in elective surgeries (Cardiac: 35-36%, Onco: 13%). The new units' revenue remained flattish (-1% QoQ). EBITDA losses increased to INR82mn from INR41mn in Q3. In FY21, the new units' EBITDA margin improved to -18% (vs. -23% in FY20).

Cayman operations likely to moderate as travel restrictions ease: Cayman operations witnessed some moderation as revenue declined sequentially by 3% to USD18.5mn. EBITDA margin declined by 187bps QoQ to 40.5%, but continued to remain significantly higher than the pre-COVID level (~25% margin in FY20). NH believes the margin is unlikely to sustain once travel restrictions ease. As per the company, Cayman's growth trajectory should improve post the commissioning of onco unit, which is 18-24 months away.

Key call takeaways: (a) India hospitals revenues - April: down by 7% MoM (vs. 3-4% down historically), May: down 3-4% MoM, COVID contribution rose to 13% in April (vs ~3% in Q4); (b) India expansion - no plans of greenfield/acquisition in the near term; c) Cayman operations - the company plans to open clinics/diagnostic centers/ retail pharmacies in the Caribbean; (d) ARPOBs are expected to moderate as routine business picks up; (e) Capex: INR2.5-3bn in FY22, INR1.25-1.5bn in FY23.

Shares of Narayana Hrudayalaya Ltd was last trading in BSE at Rs.487.95 as compared to the previous close of Rs. 504.9. The total number of shares traded during the day was 75524 in over 3430 trades.

The stock hit an intraday high of Rs. 514.25 and intraday low of 485. The net turnover during the day was Rs. 37565292.

Source : Equity Bulls

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