Narayana Hrudalaya's Q4FY19 results (Outperformer) - Turnaround sustains

Q4FY19 result highlights

• Revenues came in higher at Rs7.7bn (+18% yoy) ahead of our est of Rs7.5bn; yoy growth was aided by Cayman consolidation. Indian revs grew +14.3% yoy to Rs6.5bn vs est   8% growth driven by strong 9% growth in Mature hospitals; Cayman revs came at Rs1.18bn (60% yoy).
• EBITDA came in at Rs896mn (71% yoy; Rs779m in Q2) vs est of Rs819m; EBITDA beat was primarily due to Cayman contribution – Rs291m vs est of Rs240m; Q3 was Rs210m.
• Indian healthcare EBITDA was Rs605m (Rs569m in Q3; Rs604m in Q2); grew 8% yoy; New hospital losses were lower at Rs159m vs Q3 loss of Rs 176mn.
• FY19 consol EBITDA grew +36% yoy to Rs2.88bn led by turnaround in Cayman (+70% yoy) and strong +29% EBITDA growth in Mature hospitals
• Led by 24.2% margins in Cayman, Consol OPM also increased to 11.7% (10.6% in Q3) vs est of 11%
• Interest Cost stood at Rs175mn below est of Rs 193mn; Depreciation came in at Rs 359mn vs est of Rs 339mn; Tax rate stood marginally higher at 22.8% (46.5% in Q3) vs est of 22.4%.
• NH reported profit of Rs373m vs (Rs127mn in Q3) est of Rs237m.

Key positives: Growth in existing hospitals, Cayman EBITDA

Key negatives: Higher depreciation

Impact on financials: We have increased our FY20/FY21 EBITDA est by 4%/3%. 

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 during FY19. 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. With 20% CAGR EBITDA growth over FY19-21e, valuations of 12.8x EBITDA (FY21e) are attractive. Maintain Outperformer with a SOTP based price target of Rs270.