Narayana Healthcare's Q1FY19 results (Neutral) - Challenging times continue

Q1FY19 result highlights

• Revenues of Rs6.5bn (+25%/+1% yoy/qoq) were inline vs our est; yoy growth aided by Cayman Island unit consolidation from Q4FY18 onwards and Dharamshila unit acquisition. Given that Q1FY18 profitability was hit by stent / GST issues, growth in base business is muted
• Employee cost came in higher at Rs1.5bn (+41%/6% yoy/qoq; est of Rs1.4bn) and other exp came inline at Rs2.98bn (est of Rs2.95bn)   
• NH reported lower EBIDTA of Rs474mn (-6%/9% yoy/qoq; Rs523m in Q4) vs est of Rs585m; OPM also came lower at 7.3% (8.1% in Q4) vs est of 8.9%.
• During the quarter, Cayman unit EBITDA was lower at $0.7m vs $1.8m in Q4; mgt expects EBITDA to recover in subsequent quarters
• The new hospitals of Gurugram, Mumbai, Dharamshila and Vaishnodevi made an EBITDA loss of Rs195m vs Rs175m in Q4 (Rs405mn in FY18); Q4 Losses were higher due to commissioning of the Gurugram hospital (Rs78m in Q4). Existing hospitals EBITDA contribution grew marginally qoq to Rs 622m vs Rs579m in Q4 / Rs554m in Q1FY18
• Interest cost came in lower at Rs172m (Rs205m in Q4FY18) vs est of Rs215m; while depreciation stood higher at Rs326mn (Rs261m in Q4FY18) vs est of 260mn.  NH reported loss of Rs41m vs profit est of Rs112m.

Key positives: Growth in existing hospitals

Key negatives: Continued losses across new hospitals; lower Cayman EBITDA

Impact on financials: We have reduced our FY19 EBITDA estimates by 3%

Valuations & view

With its focus on affordable healthcare, NH is a differentiated model in the Indian healthcare space. While NH has done a stellar job in terms of growing its 3 core hospitals thereby establishing the scalability of its model, the pace of ramp-up / extent of start-up losses across most of its new hospitals has been disappointing. Losses in Gurugram and Dharamshila units along with continued losses in Mumbai Children hospital will continue to pressure EBITDA growth in the near term. The acquisition of Cayman unit (while aiding EBITDA growth in FY19) has led to significant increase in debt (~3x FY19e EBITDA) likely restricting NH’s ability to pursue newer growth opportunities. Given the challenges on new hospital profitability, increase in debt and pressure on return ratios, we see limited upside opportunities in the near term. Maintain Neutral with TP of Rs249 (17x FY20 EV/EBITDA). Signs of pick-up in traction in newer hospitals will be trigger for upgrade.