Edelweiss Suggest A Buy A On This Healthcare Stock For Up To 28% Gains

About the company given a ‘Buy’ call by Brokerage house Edelweiss

Max Healthcare Institute Limited (MHI) is one of India's leading hospital chains with 16 facilities and ~3,400 beds. MHI was formed after the merger of Max Healthcare and Radiant (effective 1st Jun'20). Besides the core hospital business, MHI also has two related businesses - Max@Home and MaxLab.

The brokerage firm has made all such details basis the interaction with Abhay Soi (Chairman & MD) in our 'Edelweiss Corporate Connect' virtual conference on 30th Jun'21. 

 

Improvement in non-Covid business:

 With the decline in Covid cases, MHI is witnessing strong bounce-back in the non-Covid business, which has also resulted in an improvement in its overall ARPOB. In the previous year, the company's business got impacted owing to nationwide lockdown and the farmers agitation. Currently, its OPD business has not yet fully recovered while the international business (contributing 10-12%) has recovered only 60% of pre-Covid levels.

Plans to reduce institutional business, improve EBITDA:

Currently, institutional business (pricing at ~40% discount to other segments) accounts for 35% of MHI's occupied beds, which it plans to lower to 15% over the next 2-3 years. The consequent 20% difference will yield 40% higher pricing, and 85% of this higher pricing will increase MHI's EBITDA. Many mature hospitals (older than five years) in Mumbai and NCR do not cater to the institutional business.

Cost- optimization plan to boost margins further:

In FY19, MHI's consolidated EBITDA (Max + Radiant) stood at ~INR356cr. MHI achieved structural cost savings of ~INR220cr in FY20 and additional cost savings of ~INR108cr in FY21, which are permanent in nature. The cost savings has resulted in EBITDA increasing by INR328cr on a base of ~INR356cr, while EBITDA/bed has soared from ~INR28lakh in Q4FY20 to ~INR47lakh in Q4FY21. Further, due to the pandemic, MHI did transient cost savings in terms of salary cuts, however, as the situation improved, original salaries have been restored., said the report.

Reiterate brownfield expansion plan:

Brownfield projects were delayed by 1-2 months due to the second wave of Covid-19, and thus, new bed capacities will be available only after 2-3 years. MHI expects no capacity addition for the next two years. Further, while expanding organically or inorganically, MHI plans to maintain geographical concentration of its hospital clusters. Currently, MHI has ~INR800cr free cash flows, which it will use to pay debt (net debt stands at INR550cr) and explore inorganic expansion opportunities.

Focus on scaling related businesses: MHI experienced robust growth in its adjacency/asset-light businesses. MaxLab and Max@Home are growing at robust rates and generating high-teens EBITDA margins. Plans are afoot to move the lab business to a separate subsidiary, which will enable MHI to focus on both organic and inorganic growth in the diagnostic space.

Outlook and valuation:

The brokerage firm is of the view that "Max Healthcare deserves superior valuations as it meets all our key investment considerations - it has a superior case mix v/s peers, brand power, quality of care, cost efficiencies and presence in premium markets (Mumbai and Delhi NCR). Further, management is focusing on (a) optimising capacity utilisation in existing facilities/resources and patient mix, (b) increasing ARPOB, (c) scaling up capital-light businesses (Max@Home and MaxLab), and (d) potential targets for M&As. At CMP of INR261, the stock is trading at FY23E EV/EBITDA of 19.6x. We have revised our earnings estimates upwards for FY22/FY23E by 9.6%/20.6%, respectively. We maintain our 'BUY' rating on the stock with a revised target price of INR331/share (we have considered an average of DCF and EV/EBITDA to arrive at our blended target price).

Stock details

Disclaimer:

These 2 stock picks are from Edelweiss Wealth Research report, investors need to do their own analysis and research before betting on any of the stock. Herein the brokerage recommendation should not be construed for investment advice.