KIMS is steadily building its empire by conquering and ruling. Buy for target price of Rs 1682 (18% upside)

Krishna Institute of Medical Sciences (KIMS) is a unique play in healthcare which has doctor partnership model. KIMS has 4,015 beds across nine multi-specialty hospitals in AP and Telangana as of H1 FY23, which is 2.2x more beds than the second largest provider in AP and Telangana. It has over 20 years of expertise in AP and Telangana. KIMS leadership in AP and Telangana are driven by (i) its clinical excellence and (ii) affordable pricing. Over the longer term, growth is expected to be robust led by expansion of operating beds, increased occupancies and improved case mix. As new hospitals move towards matured category, revenue and EBITDA margins would gain traction because 55% of beds capacity is from new and acquired clusters. With bed capacity ramp up over the next few years, the revenue is expected to remain robust. We assign 20x EV/EBITDA on FY25E EBITDA and arrive at Rs 1,682 per share,translating into an upside of 18% and hence, we assign Buy rating on the stock.

Largest player in AP and Telangana – KIMS is one of the largest corporate healthcare groups, in AP and Telangana, which has bed capacity of 4,015 beds including over 3,543 operational beds. AP and Telangana has a perfect mix of demand and supply mismatch. Both these states has high per capita income and low insurance penetration which helps KIMS to enjoy its leadership position in the region mainly due to (a) higher share of operational beds, and (b) proven quality services.

Inorganic growth: A tested and successful recipe

KIMS has a proven track record for acquiring assets at attractive valuation and turning around a company. KIMS has acquired 6 assets from FY16 to FY22, out of which 3 were negative EBITDA preacquisition. Post the acquisition all the assets have EBITDA margins in the range of 5%-30%. This has been a successful strategy for the company as it reduces the breakeven time significantly. The acquired assets have delivered revenue CAGR growth of 47% from FY19-FY22. Going ahead, we expect the acquired assets of the company to deliver revenue CAGR of 8% in FY22-FY25E mainly driven by Vizag and Ongole.

Doctor Partnership Model – A unique way to retain talent

The company has a unique model of partnering with doctors by giving them equity stakes of the company. This has helped the company to attract and retain the talent. The doctors currently hold 9% equity stake in the company. In CY22, the company has partnered with Dr Raj Nagarkar to set up a multispeciality hospital: KIMS Manavata Hospitals at Nashik with total bed capacity of 325 beds. Apart from this, it also acquired 51% in Nagpur Kingsway Hospital which will add further growth to the topline.

One of the highest EBITDA Margins in the industry

KIMS has one of the highest EBITDA margins in the industry to tune of 30% in FY22. It is because of cost efficiency and higher inpatient volume. Steady cost and expanded business operations led to improvement in EBITDA Margins from 9.2% in FY19 to 31.6% in FY22. Going ahead, we expect EBITDA to witness CAGR growth of 16.9% from FY22-FY25E on the back of expansion of beds capacity and improvement in ARPOB. We expect ARPOB to grow at CAGR of 8.6% from FY22-FY25E. However, the occupancy level will reduce to 61% in FY25 from current levels of 80% due to additions of beds.

Expansion of beds – Increasing beds capacity by 75%

The company plans to add beds capacity of 2200-2300 beds over a span of 3 years which will increase the number of operational beds by 75% from 3064 in FY22 to 5375 beds in FY25E. KIMS will be adding 700 beds through brownfield expansion across its Kondapur, Vizag and Anantapur units for total capex of Rs3.8bn over FY22-25E. Further company is looking to add additional 1000 beds through greenfield across Bangalore and Maharashtra regionsfor capex spend of Rs.9 Bn. Since, KIMS already has presence in Telangana and AP regions it won’t be difficult for them to attract patients in Bangalore due to strong regional connect. Even in Nagpur and Nashik, KIMS won’t have much difficulty in attracting patients due to strong regional hold of previous doctors. After acquiring the assets, it has retained its name and has co-branded it, so that it’s easy for patients to recall the brand. This will help to boost revenue growth going forward. The capex will largely be funded by internal accruals as the company has healthy cash flows. Despite large capex cycle, the returns ratios are expected to be healthy for the company with ROE and ROCE of 18% and 17.6% in FY25E which are better as compared to its peers.

Valuation are comforting!

Currently, the stock is trading at comforting valuation on FY25E EV/EBITDA of 15x. We value the stock at 20x (in line with its historical average) due to capacity and geographical expansion, improved margins and robust revenue growth, thereby, arrive at target price of Rs 1,682 per share which offers upside of 18% from current valuations. Therefore, we assign BUY rating on the stock.