Narayana Hrudayalaya Ltd - Stock Valuation and Financial Performance

Strong number with sequential improvement in average revenue per occupied bed (ARPOB).

Market Cap Rs. 15,119 cr

CMP Rs. 738 |PE 38x FY23

Click here for 10 year X-ray

Key Highlights:

·         Occupancies in India hospitals came in at ~49.7% vs 48.1% last quarter.

·          Revenue growth in Cayman was 47.6% YoY, primarily due to lifting of curbs.

·         International patients share in the total payee mix improve to 8% vs 6% last quarter.

·         It continued to witness strong growth in high-end cardiac procedures, organ transplants, bone marrow transplants and robotic procedures across network hospitals.

·         Capex incurred in H1FY23 was ~Rs. 550cr.

Management Outlook:

·         International patients have started to recover towards pre-Covid levels.

·         Margin expansion in existing mature hospitals can come through increased efficiencies such as reducing length of stays, changing payee-profile and focussing on higher-end surgeries.

·         Management is confident that the next level of growth can only be driven by capacity expansion. It plans to do end FY23 with a capex of Rs. 1,000cr. Additional capex of another Rs. 1,000cr has also been planned for FY24.

·         Q3FY23 is expected to be a seasonally weak quarter due to Diwali in October as well Durga Puja in eastern part of India.

Annual Report Theme: Reflection

“After spending years on cost reduction, we made massive difference to the common man of our country and set an example for the rest of the world to follow. Dr. Devi Shetty’s first patient 31 years ago paid one and a half lakh rupees for a bypass grafting. Today, we are doing bypass for poor patients at the same cost. However, we have reached an inflection point on reducing costs. We can’t reduce costs further without compromising on the quality of the surgery.”

Low Cost Health Insurance

There is only a certain point till which cost of healthcare can be reduced and NH’s management is of the view that they are near it. The only way to provide access to affordable healthcare going forward is with innovation in low cost health insurance.

Out of pocket payment for healthcare is a third world phenomenon. India is no longer a third world country and we need to build new avenues to pay for healthcare. A financial intermediary pays for healthcare in most parts of the world. The cell phone revolution taught us a very interesting lesson – Indians are willing to pay a small amount of money in instalments for essential services. We believe that the future of healthcare services in India is closely linked to innovation in low cost health insurance. There are a lot of exciting companies developing satchet-sized insurance as well as integrated healthcare plans.

Electronic Medical Records

EMRs improve quality of care, patient outcomes and safety through improved management, reduction in medication errors, reduction in unnecessary investigations, and improved communication and interactions among primary care providers, patients, and other providers involved in care.

Mass adoption of EMR happened in USA because of $24 billion in grants given by the government to all hospitals. To improve the safety of healthcare in India, EMR adoption is critical. Today, small hospitals and nursing homes are reluctant to adopt EMR because of the time spent on learning a new system. If a small amount of money is paid per patient, nursing homes and clinics across the country will be incentivized to adopt electronic medical records. India is perhaps the only country which can do it at scale because of the extremely talented pool of software engineers who can develop most advanced electronic medical records and make it available at an affordable price.

Rapid expansion of Nursing and Medical Colleges

India requires a large healthcare staff to service its population. Currently, it is lagging developed countries by a huge margin in terms medical professionals required.

There are 2,600 nursing colleges offering nursing degree programs in USA. With less than a quarter of Indian population, USA graduates over 1,55,000 registered nurses per year. India has 2,500 colleges teaching General Nursing and Midwifery (GNM) and 1,900 colleges offering BSc Nursing. About 90,000 GNM and 100,000 BSc Nurses graduate each year. For 10,000 people, India has 21 nurses while USA has 116 nurses.

Business Performance

After the effects of the second wave of the pandemic subsided, there was a gradual recovery of business over the subsequent few months, with the Indian businesses reporting record profitability during the third quarter of the fiscal year, surpassing the pre-COVID highs for the first time, despite that being historically a seasonally moderate period. Unfortunately, the third wave of the pandemic again had a negative impact on our Indian operations during the fourth quarter, but ended the year on a strong note due to the recovery in March of 2022.

Operating Revenue: Rs. 3,701cr (vs Rs. 3,128 cr in FY20 which was largely a normal operating year)

EBITDA: Rs. 688cr (vs Rs. 447cr in FY20)

EBITDA Margin: 18.6% (vs 14.3% in FY20)

PAT: Rs. 342cr (vs Rs. 119 cr in FY20)

PAT Margin: 9.2% (vs 3.8% in FY20)

Operational Beds: 6,011 (vs 5,859 in FY20)

Overseas Business

NH’s Cayman Island hospital has shown strong financial performance and this has provided NH with increased confidence to expand its offerings and operations in the region. It is also exploring opportunities in other Caribbean countries.

Our overseas Cayman Island operations continued its excellent growth trajectory in FY 2021-22, delivering an impressive EBITDA of US$39.7 million, growing at over 50% on YoY basis in the FY 2021-22. During the course of the year, we inaugurated a state-of-the-art clinic in the heart of the city, which will be integrated into the larger new campus upon its completion. We look forward to launching the expanded operations on the new campus, beginning with the Radiation Oncology programme, in a staggered manner due to the global supply chain disruptions affecting an entirely import-reliant nation like Cayman Islands for building materials and equipment. During the period, our Caribbean hospital consultancy assignment in St. Lucia also contributed to the overall profitability. We are optimistic that this regional business will emerge a strong pillar of our future growth.

Portfolio Rationalisation

As part of its portfolio rationalisation, NH exited operations at its ophthalmology-focused centre in Kolkata, the Rotary Narayana Eye hospital, as well as its fledgling Cardiac Care operations in Chittagong, Bangladesh, to sustain the long term interest of the business.

Oncology

NH is trying to diversify its specialty-profile and Oncology seems to be one of the focus therapies for the company. It is already ugrading three of its centers to Comprehensive Cancer Centers, with primary focus on developing capabilities in tier-2 and 3 cities.

NH is one of India's major private cancer care providers, delivering Radiation Therapy, Medical Oncology, Hemato-Oncology, and Surgical Oncology services as well as complete cancer diagnosis and treatment. Over the years, our team of Hemato-Oncologists, Radiation Oncologists, Medical and Surgical Oncologists, nuclear medicine experts, radiologists, pathologists, and other experts have worked tirelessly to provide high-quality care to thousands of patients. NH is in the process of upgrading three more centers to Comprehensive Cancer Centers - Jaipur, Shimoga and Ahmedabad. LINAC at Delhi, Kolkata and Bangalore have been upgraded to provide latest treatments. A special focus is to develop additional capabilities in tier 2 and tier 3 cities and its showing results. Jammu, Raipur, and Guwahati have emerged as centers of choice for Cancer Care for regional population.

Cardiac Sciences

NH has a strong cardiac science franchise which it is leveraging to become an integrated, multi-speciality group with increased interdisciplinary collaborations.

NH’s top-ranked team of Cardiologists and Cardiac Surgeons diagnoses and treats close to 5 lac adults and children each year, including those with complex or rare conditions. Our Cardiac sciences is one of the largest and most comprehensive heart practices in the world. It includes more than 400 subspecialized experts trained in Congenital Heart Disease in adults and children, Coronary Artery Disease, Structural Heart Disease, Heart Rhythm Disorders and Aortic Artery Diseases. Our Cardiac sciences specialists are part of an integrated, multidisciplinary group, collaborating with experts in many specialties to provide our patients with comprehensive and seamless care. These experts include doctors trained in Surgery, Radiology, Pathology, Endocrinology, Nephrology, Pulmonology, intensive care and other areas, depending on the patient’s condition.

Neurosciences

Interventional Neurology services started at NH Mazumdar Shah Medical Centre (MSMC), Bengaluru in 2009. MSMC was the first Centre in India to do temporary endovascular bypass/ stent retriever for stroke (2010) and the first Centre to do mechanical thrombectomy for Paediatric patients in Asia. We were the first centre to use Artificial Intelligence(AI) in stroke imaging ( RAPID system) in India. MSMC has crossed 5500 cases in total.

Organ transplants

Our goal at NH is to offer the widest range of treatment options to patients with end stage kidney failure, liver disease, heart failure and bone marrow failure. Organ transplantations save lives in patients affected by terminal organ failures, and it immensely improves quality of life, reduces co-morbidities, allows our patients to get back to leading near normal life. Performance 50 Liver Transplant, 14 Heart Transplant, 560 Kidney Transplant and 200+ Bone Marrow Transplant.

Robotic Surgery

Robotic surgery, also called robot-assisted surgery, allows doctors to perform many types of complex procedures with more precision, flexibility and control than is possible with conventional techniques and is minimally invasive. NH has performed 227 robotic surgeries during the year under review representing growth of 132%

Orthopaedics

NH provides comprehensive and world-class orthopaedic services. This department offers specialized care in the field of complex trauma, poly-trauma and related sub-specialities. The Orthopaedic department at our hospitals delivers personalised care utilising the latest research and evidence-based medicine. The department provides management related to disorders of bone, joint and a variety of musculoskeletal disorders. During FY22 the NH performed 1500+ Knee Replacement, 500+ Arthroscopy, 500+ Hip Replacement.

Way Forward per Management

• Expansion Plans: While continuing to build upon our solid consolidation of Indian operations over the last few years, we have been prioritizing debottlenecking and brownfield expansion at our existing centres having announced plans across the network. Going ahead, to complement our already announced expansion plans at Cayman Islands, in India we shall also be open towards pursuing strategic growth avenues through greenfield facilities at our core regions as well as inorganic opportunities on opportunistic basis with the idea of deriving synergies from our existing operations.
• Exploring New Business Models:Being agile and to ensure comprehensive service offerings, we shall also be exploring integrated managed care delivery model focusing on increasing wellness of an individual through retail touchpoints across select locations.

Narayana Hrudayalaya Ltd | Market Cap: Rs. 13,936 Cr

CMP 682 | P/E 36x FY23

Click here for 10 year X-ray

Key highlights:

• Occupancies in India improved to 48.1% in 1QFY23 (vs 42.1% in 4QFY22)
• Continues to benefit from a higher mature hospital mix (beds <5 years old were 12% in 1QFY23 vs 45% in FY2017)
• Strong performance of flagship hospitals in India as well as steady growth in Cayman. However, Cayman operations in were impacted due to Covid restrictions.
• ARPOBs were driven by mix improvement & volume growth.
• Despite occupancy being at 67%, the Mumbai hospital is operating at EBITDA breakeven. New Hospitals reported the EBITDA margin of 6.5%.

Management Outlook

• The key driver for ARPOBs will be mix improvement, volume growth, and throughput. Will take a low single digit price hike in Jan’23.
• Focusing on high-risk pregnancies in addition to high-end NICU, cardiac sciences and transplant programs. The high-end procedures require additional manpower, which is having an impact on margins.
• Greenfield expansion will be in Kolkata and Bangalore. The company will build specialties and capabilities in different units and will be expanding in the Health City, Bangalore. It will add oncology units in all hospitals, and carry out a brownfield expansion in the Kolkata facility
• Overall, capex of Rs.110 Cr was incurred in 1QFY23. The company is on track for Rs. 100 Cr+ capex in FY23. This is a mix of greenfield, brownfield and inorganic. The capex incurred in FY23 will be mostly focused on increasing yields per room than just increasing no. of beds.
• The company aims to reduce ALOS from current levels of 4.6 to 4.2.

Narayana Hrudayalaya | Market Cap Rs. 13,059cr

CMP Rs. 639 | FY23 EV/EBITDA ~17x

About the Company

Narayana Hrudayalaya Ltd. (NHL) operates a chain of multispecialty, tertiary and primary healthcare facilities. It was established by Dr. Devi Shetty, who has over 37 years of medical experience, in the year 2000. The Group, which originally focused on cardiac and renal sciences, expanded to additional areas of focus such as cancer care, neurology and neurosurgery, orthopaedics, and gastroenterology and was rebranded as “Narayana Health" in 2013.

NHL has a strong presence in Karnataka and eastern India, with an emerging presence in western, central and northern India. It has a network of 44 healthcare facilities, including 19 owned/operated hospitals, 2 managed facilities, 4 heart centres, 18 primary healthcare facilities and 1 hospital in Cayman Islands. It had 6,011 operational beds and capacity of 6,584 beds as of March 2022.

Industry Overview

India’s healthcare delivery market grew from Rs. 2.5trn in FY16 to Rs. 4.3trn in FY21 at a CAGR of 11-13% as per a CRISIL report. The growth slowed due delay in elective surgeries on account of COVID-19. However, growth is expected at a rate of 15-17% till FY25 as per the report.

The healthcare sector includes various industries such as hospitals, diagnostics, pharmaceuticals and medical devices. Hospitals have the highest contribution in the entire healthcare sector, contributing 61% of the total revenue in FY20.

India’s healthcare expenditure as a % of GDP stands at 3.5%, which not only trails developed countries like USA and UK but also developing countries such as Brazil, Nepal, Vietnam, Malaysia and Thailand. The bed density in India is 15 beds per 10,000 population, way behind the global median of 29 beds per 10,000 population.

Key Business Parameters

Revenue

The company’s revenue increased from Rs. 2,281cr in FY18 to Rs. 3,701cr in FY22 at a CAGR of ~13%. The growth in revenue was a combination of increase in number of operational beds, better occupancy and hike in ARPOB.

Average revenue per occupied bed/ day (ARPOB)

NHL’s ARPOB has grown from Rs. 22,158 in FY18 to Rs. 32,329 in FY22 at a CAGR of 9.9%. However, it is still one of the most affordable hospitals when compared to other multispecialty hospitals such as Apollo Hospitals (Rs. 45,327), Max (Rs. 59,000) and Fortis (Rs. 48,000).

EBITDA Margin

NHL has consistently been able to improve its EBITDA margin except for a drop in FY21 (due to COVID-19). The reason for improving EBITDA margins has primarily been the new hospitals maturing and turning profitable.

Management

Dr. Devi Prasad Shetty is the Chairman of NHL. He is a cardiac surgeon with over 37 years of experience. He established NHL in 2000. He also initiated the concept of “Micro Health Insurance Scheme” in Karnataka, which eventually led to the Karnataka government implementing the Yeshasvini Scheme, a micro health insurance scheme for rural farmers.

Dr. Emmanuel Rupert is the MD and Group CEO. He joined NHL in the year 2000. He has over 25 years of clinical experience and 10 years of experience as an administrator in healthcare delivery.