Narayana Healthcare's Q2FY19 results (Neutral) - Strong rebound from a weak Q1

Q2FY19 result highlights

• Revenues of Rs7.1bn (+27%/+9% yoy/qoq) were ahead vs our est of Rs6.9bn; yoy growth aided by Cayman Island unit consolidation from Q4FY18 onwards and Dharamshila unit acquisition.
• Employee cost came in higher at Rs1.55bn (+42%/3% yoy/qoq; est of Rs1.5bn) and other exp also came higher at Rs3.13bn (est of Rs2.98bn)   
• EBIDTA of Rs730mn (+26%yoy; Rs474m in Q1) was sharply higher vs est of Rs649m; OPM also increased to 10.3% (7.3% in Q1) vs est of 9.4%.
• EBITDA surprise was driven by strong profitability improvement in the existing hospitals especially >5 years old cluster. Existing hospitals EBITDA grew to Rs777m vs Rs622m in Q1. Cayman also recovered.
• The new hospitals of Gurugram, Mumbai, Dharamshila and Vaishnodevi made an EBITDA loss of Rs173m vs Rs195m in Q1 (Rs405mn in FY18);
• Interest cost came in at Rs182m vs est of Rs200m; while depreciation stood higher at Rs340mn (Rs326m in Q1FY19) vs est of Rs300mn.  NH reported profit of Rs136m vs (loss of Rs41mn in Q1) est of Rs121m.

Key positives: Growth in existing hospitals, Cayman EBITDA

Key negatives: Continued losses across new hospitals

Impact on financials: We have increased our FY19 EBITDA estimates by 7%

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 (reaffirmed again in Q2 post the Q1 dip), 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 Rs254 (18x FY20 EV/EBITDA). Signs of pick-up in traction in newer hospitals will be trigger for upgrade.