Pharma || Hospitals || Diagnostics : Industry perspective

Curious if you’re still tracking hospitals? From what I understand, hospitals is a multi-decade trend as our median age inches up. Within the space, nearly all hospital assets are now trading at upwards of 50x PE (exception of Yatharth).

From a qualitative standpoint, metrics being tracked / judged on are:-

1. ARPOB
This affects RoCE directly. Higher the ARPOB, more the absolute EBITDA would be even if margins remain the same. Drivers of ARPOB usually are complex specialities such as oncology, neurosciences, cardiac sciences, etc. All these require attracting medico staff with high patient loyalty. Most of them go to the bigger brands (Fortis / Apollo / Max / Medanta, etc.). Currently, Max Hospitals has the highest ARPOB at upwards of 70k (Q3FY24) while Yatharth has the lowest (33k)

2. Payer mix
More self payer and third-party insurance mix, higher the institutional rates and shorter would be debtor days (since govt usually takes long to release payments). Most of the hospitals mentioned in #` above have OCF / EBITDA in the range of 60-70% which is quite healthy. Again, most of these hospitals have high proportion of self pay / TPA mix while low govt mix (opposite for Yatharth).

I’m closely following the space since I’m invested in Yatharth because of a) extremely cheap valuation compared to peers; and b) multiple earnings trigger in FY25.

Yatharth has done 87crs of EBITDA in H1FY24, and I expect it to cross 200crs in FY24. It has 300crs of surplus cash so as on date, EV is around 2920 crs. Therefore, an EV / EBITDA of around 14.5, the cheapest among the lot by a significant margin.

Valuation re-rating triggers could be:-

1. Increasing utilisation levels across Greater Noida & Noida Extension hospitals, leading to higher margins (operating leverage play)
2. Higher ARPOB due to introduction of robotic surgery in Q4FY24
3. Renegotiation of rates with GoI and reduction in debtors (cash flows)

Risk

1. Ramraja Hospital case (land dispute) going the MP govt way, but I don’t see this risk playing out in foreseeable future.

Happy to discuss and brainstorm ideas if people are tracking this space.

Thanks!