Narayana Healthcare's Q4FY18 results (Downgrade to Neutral) - Profitability hit by new hospital losses

Q4FY18 result highlights

• Revenues of Rs6.5bn (+34%/+17% yoy/qoq) were inline vs our est of Rs6.4bn; yoy / qoq growth aided by Cayman Island unit consolidation from Q4FY18 onwards. YoY growth was aided by Dharamshila unit acquisition
• Employee cost came in higher at Rs1.4bn (+54%/33% yoy/qoq); while other exp came in lower at Rs2.9bn (est of Rs3.3bn)   
• NH reported lower EBIDTA of Rs523mn (-13%yoy; +2%qoq) vs est of Rs574m; Notably EBITDA is flat qoq despite consolidation of Cayman Island unit in the quarter and Q4 being a seasonally strong quarter. OPM also came lower at 8.1% (9.3% in Q3FY18) vs est of 8.9%.
• The new hospitals of Gurugram, Mumbai, Dharamshila and Vaishnodevi made an EBITDAR loss of Rs175m in Q4 / Rs405mn in FY18; Q4 Losses were higher due to commissioning of the Gurugram hospital (Rs78m in Q4)
• Interest cost came in higher at Rs205m (vs 82m in Q3FY18) vs est of Rs103m due to increased debt and other charges.  PAT came in lower at Rs98m aided by Rs6m tax credit vs est of Rs136m.

Key positives: Growth in existing hospitals

Key negatives: Continued losses across new hospitals

Impact on financials: We have reduced our EBITDA estimates for FY19/20 by 16%/10% to account for higher losses from the new hospitals

Valuations & view

With its focus on affordable healthcare, NH is a differentiated and scalable model in the Indian healthcare space. While NH has done a fairly stellar job in terms of growing its 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. Incremental 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. Downgrade to Neutral with TP of Rs256 (17x FY20 EV/EBITDA). Signs of pick-up in traction in newer hospitals will be trigger for upgrade.