Narayana Hrudayalaya Limited- Research Report By Angel (Neutral)

Narayana Hrudayalaya (NHL) is one of the leading private healthcare service providers in India with a strong presence in Karnataka and the Eastern region with while it is growing its presence is other parts of India as well. The company has a relatively light asset model with it owning just 1,613 out of its 5,442 operational beds. It has a strong brand name and is known for its clinical excellence and being an affordable healthcare service provider. It currently has 23 hospitals. Potential improvement in profitability: Generally, hospital businesses have a long gestation period before they mature (in terms of occupancy rates) and it may operate at a loss for a period of time before achieving profitability. Currently, NHL is in an investment phase where the company has increased its bed count at a higher rate in comparison to its peer Apollo Hospitals (Apollo). As a result, its top-line has grown at a faster rate but its occupancy and profitability levels are not as high as that of Apollo. Going forward, with NHL’s pace of expansion being slightly slower than in the past, we expect it to gradually increase its occupancy rates and enhance its profitability. Upcoming projects under light asset model to complement growing need for healthcare delivery in India: Unlike its peers, which have higher number of owned hospitals, NHL has fewer owned hospitals while the rest are on either lease & operate, revenue sharing, or managed basis. Going forward, the company plans to expand its bed-count following the asset light route, which would include PPP or on operation and management basis, to grow its presence in other parts of the country. Moreover, India lags behind other developing and developed countries in terms of overall bed density, total expenditure on healthcare, and consumers here incur a higher out-of-pocket expenditure on healthcare. We believe that the company can gradually build its presence with efficient use of capital and by leveraging on its brand name to capitalize on the available opportunity in the under-penetrated healthcare delivery market in India. Outlook and Valuation: Currently, NHL’s operating margin is lower than its close peer Apollo Hospitals on account of lower realizations (focus on affordable healthcare) and has lower occupancy rates. Since the hospital business has longer gestation period, we expect the occupancy and overall profitability to improve over a longer period of time. On the valuation front, at the upper end of the price band, FY2016E annualized EV/Sales multiple works out to 3.4x for NHL which is not at a significant discount to Apollo (which trades at 3.6x). Hence we have a Neutral view on the IPO from a short term perspective. However, investors with a longer term investment horizon can subscribe to the issue considering that the company’s performance is expected to be more favorable in the longer run as the hospital business entails a longer gestation period and takes time to perform at optimum levels.