Aster DM healthcare

Hi Rishabh

An alternate view for your consideration

1. Valuation post merger (analysis done on a pre-tax basis for simplicity – please do your own post tax assessment of cash payment)

• Market cap today (pre-merger): ~Rs 20,500 cr
• Implied market cap for India business: Rs 7,000 cr (Rs 13,500 cr value of GCC business based on equity value of Rs 1 bn + GCC Debt of USD 650 mn)
• Implied EV/EBITDA (TTM) of India business net of cash = 13 (EV/India TTM EBITDA. Assume 100% GCC equity value paid out)
• From an industry perspective, you could look at other similar companies (my review was EV/EBITDA is of the magnitude of 18-40). So on a relative basis looks to still be undervalued. Once detailed historical financials for India business are available, should be possible to understand DCF basis

2. GCC Cash cow and outloook for future investments

• While the GCC was the cash cow for the business, the India business is now generating cash – using EBITDA as a proxy for OCF, it now contributes 31% of EBITDA (TTM) vs 29% in FY22.
• Key drivers for improvement in cash flow is maturity of Indian hospitals (>3 years), more leased land for hospitals, brownfield rather than greenfield expansion and initial testing of asset light O&M options
• Cash flow should further improve as newer hospitals also mature (ROCE of hospitals >3 years is 25.8% vs total ROCE of 14.1% for India)
• Perhaps the GCC might have provided some incremental cash for further expansion. It now appears that for keeping the same pace of expansion, there would likely be an increase in debt in India (headroom is improved after higher debt GCC entity separates) and likely Private Equity investment (as per the Q2 FY24 call and general interest in the industry). Of course, PE investment will result in dilution – but the expectation is that they should drive further value

3. Competitive dynamics

• Supply side economics: There are indeed many hospitals in India (large national – Apollo, large regional – Narayana, Aster, Max, Medanta, etc, plenty of small ‘unorganised’ local ). Within regions the competitive dynamics vary – e.g. in Kerala I would say that Aster is the market leader. In Karnataka it is more competitve. However, I am not convinced being a national players adds any benefits compared to regional for hospitals (unlike pharmacies where procurement volumes matter). Happy to hear alternate views
• Demand side economics: I am not sure India is yet at a stage where Supply > Demand. If you look at most hospitals, mature hospitals are able to maintain 65%+ occupancy with increasing ARPOBs. New hospitals reach similar numbers in 3 years. We are perhaps still in a secular demand stage which will only accelerate with increasing wealth, health awareness and insurance penetration

Hope this helps in your thoughts

Disc: Invested with a full position and likely to be biased. Am not a SEBI registered advisor and none of the above is investment advice – please do your own due diligence