Narayana Hrudayalaya's Q3FY18 results (Outperformer) - New hospitals continue to drag profitability

Q3FY18 result highlights

• Revenues of Rs5.5bn (+22% yoy; -1% qoq) was marginally higher vs est (Rs5.4bn); yoy growth marginally aided by Dharamshila unit consolidation
• NH reported lower EBIDTA of Rs515m (-2%/11% yoy) vs est of Rs572m. OPM also came lower at +9.3% (10.4% in Q2FY18) vs est of 10.5%.
• EBTIDA miss led by ~Rs100m losses in 3 new hospitals – with continued losses in Mumbai Children hospital (EBITDAR loss of Rs69mn vs Rs80mn/Rs70mn in Q2/Q1). There were losses in Dharamshila unit due to hiring of new doctors while Gurugram hospital had pre-operating losses.
• Adjusted for new hospital losses, the existing hospital network continued its growth momentum with rev growth of +16% yoy with +17% EBITDA growth; In particular, NH’s mature hospital cluster continues to display very strong growth. Mature Hospitals (> 5 years) grew 18% yoy with EBITDAR of 24.1% (24.7% in Q2FY18 and 24.7% in FY17); 3-5 year units grew 14% with EBITDAR of 6.2% (11% in Q2 and 8.8% in FY17).
• Cayman unit revenues of $11.4mn ($11.6mn in Q2) witnessed a significant pick up in adj margins at 21% (15.9% in Q2). Reported margins stood at 14.9% led by onetime processing cost of $0.69mn.
• Interest cost came lower at Rs82m (vs 78m in Q2FY18) vs est of Rs100m. Tax rate came in higher at 42% (35% in Q2FY18) vs est 35%. Consequently PAT came lower at Rs141m (Rs165m in Q2FY18) vs est Rs173m.

Key positives: Steady growth in existing hospitals

Key negatives: Higher debt; losses in new hospitals

Impact on financials: We have broadly maintained our EBITDA estimates

Valuations & view

NH, a multi-specialty hospital chain that delivers quality but affordable healthcare, has a differentiated and scalable business model in the high-potential Indian hospital space. While Karnataka and East India dominate its current geographical footprint, NH is aiming to create a strong presence in the high-value markets of Mumbai and NCR in its next growth phase. Its 24% operational EBITDA margin for mature hospitals (>five years old) validates the efficacy of NH’s model. We maintain our Outperformer rating. Slow ramp-up in the new Mumbai / Gurgaon units remains key risk to our estimates.