HealthCare Global Enterprises' Q3FY18 results (Outperformer) - Soft quarter

Q3FY18 result highlights

• Revenues grew by 17% yoy to Rs2.06bn (-2% qoq) lower than our estimate of Rs2.11bn with the HCG centres posting a growth of 17% yoy and the Milann centres growing 19% yoy.
• EBITDA stood lower at Rs261mn (flat qoq) below estimate of Rs305.  Margins stood lower at 12.6% (vs 14.7% in Q2) vs our est 14.4% led by losses in the new centres. Overall, the new centres (commissioned since FY16) generated an EBITDA loss of 48mn vs loss of Rs21mn for Q2FY18. Existing centre EBITDA stood sequentially lower at Rs309mn (vs Rs332mn in Q2FY18).
• Other income higher at Rs59mn (Rs19mn in Q2) led by write back of liabilities. Depreciation stood higher at Rs182mn (+9% qoq) vs est of Rs175mn while tax rate stood significantly higher at 69% (est of 34%). Consequently reported PAT stood lower at Rs12mn vs est of 20mn

Key positives: inline int cost;

Key negatives: lower revs, GMs, new centre losses and higher debt guidance

Impact on financials: We have reduced our FY18/19E/FY20E EBITDA est by 4%/7%/7% to account for higher losses from the newer hospitals

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. Refer our initiating note highlighting HCG’s model in in detail HCG - Aug16 (IC).pdf. 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.