Narayana Hrudalaya's Q3FY20 results (Outperformer) - Steady quarter; margin improvement aids profitability

Q3FY20 result highlights

• Consol Revs came at Rs7.9bn (7% yoy; 9% adj for closure of Whitefield unit) below est of Rs8.3bn. Cayman revs grew 5.5% yoy to Rs1.1bn. Indian hospital revs grew 7.6% yoy with mature hospitals growing 7% yoy
• Reported EBITDA came at Rs1bn. Adj for IND AS 116 impact and shutdown of Whitefield operations to the tune of Rs63m and Rs45m respectively, consol adj. EBITDA stood at Rs1009m above est of Rs985m; 24% yoy.
• Cayman EBITDA grew 18% to Rs264m – inline; India hospital adj. EBITDA grew 23% yoy to Rs746m inline with est
• Mature hospitals adj. EBITDA grew 16% yoy to Rs844m (est of Rs909m) while new hospitals losses stood at Rs143m (vs Rs139m in Q2). Heart centres posted a double-digit EBITDAR margin at 22.7% vs 9.9% in FY19
• Led by 24.3% margins in Cayman, Consol adj. EBITDAM increased to 12.3% (13.8% in Q2) above est of 11.8%
• Adj. Interest Cost stood at Rs 162m inline with est; Adj. depreciation came in at Rs 382m – above est of Rs350m; Adj. tax rate stood higher at 13.2% (21.4% in Q2) vs est of 27%.
• NH reported profit of Rs314m. Adj PAT stood at Rs403m vs est of Rs391m (Rs479m in Q2)

Impact on financials: We have marginally increased our EBITDA estimates

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. Revenue and profitability have picked 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 14% CAGR EBITDA growth over FY20-22E and 16% / 17.5% RoE / RoCE in FY22E, valuations of 13.5x EBITDA (FY22E) are attractive. Maintain Outperformer with a SOTP based price target of Rs416. NH is one of our top healthcare services pick.