Buy This Hospital Stock, Shares Can Jump Sharply

Broking firm, Prabhudas Lilladher has suggested buying the stock of Narayana Hrudayalaya (NARH) for good gains. The broking firm has set a price target of Rs 810 on the stock as against the current market price of Rs 711.

Narayana Acquires Shiva Orthopaedic Hospital

According to Prabhudas Lilladher, the hospital recently signed an agreement with Shiva and Shiva Orthopaedic Hospital to acquire its 100 beds Orthopedic and Trauma Hospital in Bengaluru on slump sale basis for Rs2.8bn (Rs800mn to be recovered after 4 years). "Though acquisition looks expensive, it will offer entire spectrum of services in Health City. We see limited impact on financials given small deal size, besides the said acquisition is in-line with guidance of Rs10bn capex as guided by mgmt. for FY23," the brokerage has said.

Growth visibility enhanced

Prabhudas Lilladher believes NARH's aggressive capex plans in India along with Cayman operations over next 2-3 years will enhance growth visibility beyond FY24. Additionally, company's ability to generate healthy margins/profitability in new Cayman unit will be a key monitorable. "We are factoring $10mn EBITDA from Cayman's new unit in FY24. Overall we expect EBITDA CAGR of 22% over FY22-FY24E and maintain 'Buy' rating at TP of Rs. 810/share, based on 20x FY24E EV/EBITDA for India business and 16x EV/EBITDA for Cayman hospitals. At CMP, the stock is trading at 16x EV/EBITDA (adj for IND AS) and 27x P/E on FY24E," the brokerage has said.

Contours of the transaction

NARH signed a Business Transfer Agreement (BTA) with Shiva and Shiva Orthopaedic hospital (Sparsh Hosur Road unit) located in Narayana Health City Campus, Bangalore where NARH already has two flagship hospitals operational: NH Cardiac sciences (offers only cardiac related services) and Mazumdar Shaw Medical center (multi-specialty hospital offering other than cardiac, orthopaedic, and trauma services).

Rs 800 million acquisition

The company agreed to pay Rs2bn upfront and subscribe for Rs. 800mn Optionally Convertible Debentures (OCDs) to be redeemed after 4 years. NARH would have the right to convert OCDs into equity shares of the company (Shiva) in case of default. There is no intent from NARH to acquire other units of Shiva and the acquisition will be completed before CY Dec-22.

Expensive acquisition, but NARH to offer entire spectrum of services in Health City

According to Prabhudas Lilladher, the Sparsh unit possesses 100 beds operational since a decade that has generated Rs490mn and Rs180mn revenues in FY22 and FY23 (4 months) along with healthy profitability. Flagship units of NARH in Health City generates +25-30% OPM. Assuming similar profitability levels, acquisition works out to be 16-17x EV/EBITDA and Rs 28mn/bed in FY22. "Prima facie acquisition is expensive (typically cost/bed including land in metros is Rs14-15mn/bed), however it allows NARH to offer entire spectrum of healthcare services in Health city. Assuming Rs 800mn money flow back to NARH after 4 years, acquisition works out to be at 12-13x EV/EBIDTA and Rs20mn/bed," the brokerage has said.

Stepping up capex across India and Cayman

NARH has earmarked Rs10bn of capex in FY23 which includes new Cayman unit, inorganic opportunities and greenfield/ brownfield expansion in India business. The company's flagship units in Health city are running at optimum utilization levels thereby earmarking brownfield capex amounting to Rs5bn over next 3 years in entire Health City. There is also provision to enhance capacity in Sparsh unit. Currently, NARH has net debt of Rs. 800mn and is generating strong FCF across business.