Maintain BUY on Max Healthcare - Emerges leaner and stronger - HDFC Securities

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

Max Healthcare's annual report 2020-21 reflects the first year of consolidated financial statements of the combined entity - Max and Radiant. In this report, while financials are not comparable due to merger, we analyse the qualitative characteristics and key components of the company's balance sheet and P&L. The management commentary reinforces its intent to grow aggressively by additionally employing asset light models of expansion and exploring inorganic opportunities. Key financial highlights include: (a) recognition of goodwill and intangibles worth INR24.5bn and ~INR23bn (both together account for ~85% of net worth) pursuant to purchase price allocation exercise in relation to Max's assets consequent to reverse merger; (b) structural cost savings in material, doctor fees and other expenses. We revise our estimates to reflect new bed expansion plans and forecast 17%/24% revenue/EBITDA CAGR over FY21-28e. Based on our long term projections, we see ~95% upside potential over the next five years (refer to our recent initiation: Max Healthcare - a three-act play: growth, quality, returns for the detailed thesis). We revise our TP to INR410/sh., based on Mar'24 EBITDA (from Mar'23). Maintain BUY.

Identifies three pillars to focus on: (a) Optimise existing network by investing in and retaining best clinical talent, improving efficiencies through payor mix optimisation, thrust on medical tourism and initiatives focused on digitisation at both back-end as well as front-end; (b) invest in growth - to add 2,300+ beds (1,630 by FY28) via brownfield route, to operationalise ~1,000 beds each through asset light models (O&M and built-to-suit) and greenfield projects (Gurugram) while continuing to explore suitable inorganic opportunities; (c) value unlock in MaxLab - aggressive plans to grow the non-captive pathology business via organic and inorganic route.

Payor mix improvement can drive 300-400bps EBITDA margin expansion: The bed share of low-margin scheme business has steadily reduced from ~37% in FY20 to ~34% in FY21. Max intends to bring this down to ~15% in the next three years. As per a recent company update, this can potentially add ~300-400bps to core business EBITDA margin of ~25%.

Key financial highlights from AR: (a) Intangible assets stood at ~INR23bn on account of recognition of service agreements with all PHFs amounting to INR17bn, trademarks worth INR5bn, representing value of Max's brand and logo and O&M rights worth INR1.2bn, representing rights to operate Nanavati hospital; (b) goodwill: Max-Radiant merger was a "reverse merger" with Radiant being the accounting acquirer and, hence, all of Max's assets got revalued leading to goodwill recognition of INR24.5bn in FY21; (c) cost structure analysis suggests that Max has achieved the leanest cost structure among major peers post the implementation of cost initiatives with major savings in material and doctor fees followed by other expenses.

Shares of Max Healthcare Institute Limited was last trading in BSE at Rs. 369.65 as compared to the previous close of Rs. 358.85. The total number of shares traded during the day was 42844 in over 1256 trades.

The stock hit an intraday high of Rs. 373 and intraday low of 355. The net turnover during the day was Rs. 15510408.

Source : Equity Bulls

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