Narayana Hrudalaya's Q1FY20 results (Outperformer) - Gaining momentum

Q1FY20 result highlights

• Consol Revs came at Rs7.8bn (19% yoy) inline with est. Cayman revs grew 44% yoy to Rs1.1bn. Indian hospital revs grew 16% yoy with mature hospitals growing 12% yoy
• Consol EBITDA came at Rs1.02bn vs est 950m; yoy EBITDA doubled on a low base; 6% qoq. Adjusting for IND AS 116 impact of Rs83m, consol adj. EBITDA stood at Rs946m largely inline with est.
• Cayman EBITDA grew 4x to Rs243m on a low base – tad below est; India hospital adj. EBITDA grew 64% yoy to Rs702m above est of Rs650m driven by a 13% increase in ARPOB to Rs9.7m
• Mature hospitals adj. EBITDA grew 40% yoy to Rs869m (ahead of est) while the new hospitals losses stood at Rs167m (vs Rs159m in Q4). Heart centres posted a double-digit EBITDAR margin at 15.6% vs 3 9.9% in FY19
• Led by 22.1% margins in Cayman, Consol adj. EBITDAM increased to 12.2% (11.7% in Q4) inline with est
• Adj. Interest Cost stood at Rs 181m above est of Rs 170m; Adj. depreciation came in at Rs 345m vs est of Rs 370m; Adj. tax rate stood higher at 27.8% (22.8% in Q4) vs est of 25%.
• NH reported profit of Rs303m vs (Rs373mn in Q4) est of Rs325m. Adj PAT stood at Rs331m

Impact on financials: We have increased our FY20/FY21 EBITDA est by 6%/5%. 

Valuations & view

Post a phase of weak operational performance due to challenges emanating from sluggish growth in existing hospitals combined with losses in newly commissioned hospitals, NH has effected a remarkable recovery over last 4 quarters. There is a sharp improvement in revenue momentum and profitability across existing hospitals while the losses in new hospitals have begun to stabilize. Strong profitability pick-up in Cayman unit is adding to the momentum. With its focus on affordable healthcare, NH is a differentiated model in the Indian healthcare space and is one of the most scalable business models in the landscape. We think that the recent challenges have helped to sharpen the operational focus within the firm which is positive from a medium term perspective. A shift in mgt focus from adding beds to enhancing efficiency of the current network to drive profitability is another structural positive. With 20% CAGR EBITDA growth over FY19-21e, valuations of 11.5x EBITDA (FY21e) are attractive. Maintain Outperformer with a SOTP based price target of Rs302. NH is one of our top healthcare services pick. ​