HealthCare Global Enterprises' Q3FY19 results (Outperformer) - PAT impacted by higher cost

Q3FY19 result highlights

• Revenues grew by 21% yoy to Rs2.5bn vs our est of Rs2.37bn with the HCG centres posting a growth of 22% yoy and Milann centres 5% yoy.
• EBITDA stood lower at Rs289mn (+11% yoy; -14% qoq) vs est of Rs308mn.  Margins stood lower at 11.6% (vs 13.7% in Q2) vs est 13%. EBITDA was impacted by higher medical consultancy at Rs568mn (+11% qoq) and empl cost of Rs486mn (+8% qoq) vs est of Rs425mn
• Overall, the new centres (commissioned since FY16) generated higher EBITDA loss of 48mn vs loss of Rs38mn for Q2FY19. Existing centre EBITDA stood higher at Rs337mn (vs Rs373mn in Q2FY19).
• Other income stood higher at Rs10mn vs est of Rs15mn. Interest cost was lower at Rs130mn (vs Rs239mn in Q2ed by forex loss of Rs93mn) vs est of 150mn. Tax rate continues to stay negative.
• Resultant there was a higher PAT loss of Rs60mn vs loss Rs76mn in Q2FY19 and our loss est of Rs39mn

Key positives: Lower interest cost, negative tax rate

Key negatives: Lower EBITDA from existing centres; higher loss from new centres, higher cost 

Impact on financials: We have maintained our estimates

Valuations & view

HCG’s business model is custom designed to provide comprehensive cancer care at competitive prices on a pan-India basis, with focus on non-metro locations. The company’s asset-light approach with focus on partnering has made its business model capital efficient and scalable. The fertility treatment segment, operated under brand Milann, follows broadly similar tenets. HCG is among the most scalable Indian healthcare models, with focus on high-potential cancer care/fertility segments. The successful ramp-up of recently commissioned centers, as reflected in its breakeven within 12 months of commissioning and limited start-up losses, significantly enhances comfort in the model’s scalability. Steady growth across 18/9 existing/new cancer centres should trigger 20%+ revenue/earnings CAGR over the next 3-5 years, with limited incremental capex spend. Given HCG’s strong growth visibility and unique business model, we maintain our Outperformer rating on the stock target price of Rs293 (16x EV/EBITDA FY21E).