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HealthCare Global Enterprises' Q1FY19 results (Outperformer) - Marginally below estimates

Q1FY19 result highlights

• Revenues grew by 19% yoy to Rs2.23bn inline vs our estimate with the HCG centres posting a growth of 21% yoy and the Milann centres de-grew by -4% yoy.
• EBITDA stood lower at Rs302mn (+4 yoy) below our estimate of Rs324.  Margins stood lower at 13.5% (vs 14.5% in Q4) vs our est 14.2%. Overall, the new centres (commissioned since FY16) generated higher EBITDA loss of 32mn vs loss of Rs21mn for Q4FY18. Existing centre EBITDA stood steady at Rs337mn (vs Rs343mn in Q4FY18).
• Other income stood lower at Rs9mn vs est of Rs30mn. Interest cost was higher at Rs175mn vs est of 110mn led by forex loss of Rs62mn. Tax rate stood negative.
• Resultant there was PAT loss of Rs63mn vs loss Rs2mn in Q4FY18 and our profit est of Rs16mn

Key positives: Steady EBITDA from existing centres; steady cost and negative tax rate

Key negatives: Higher interest cost, lower other income

Impact on financials: We have maintained our EBITDA estimates and reduced our FY19E/FY20E earning estimate by 13%/15% led by higher interest cost

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, reflected in breakeven within 12m of commissioning and limited start-up losses, significantly enhances comfort of the model scalability. Steady growth across 18/9 existing/new cancer centres should trigger 20%+ revenue/earnings CAGR in 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.