Strong Buy Of Narayana Hrudayalaya Ltd For 34% Upside Potential

Narayana Hrudayalaya Ltd.: Marching ahead profitably

We initiate coverage on Narayana Hrudayalaya Ltd. (Narayana) with a Strong Buy rating.

Narayana is a chain of multi-speciality hospitals, heart centres, and primary care facilities with its headquarters in Bengaluru, India. It was founded by Dr. Devi Shetty in the year 2000.

The beginning was humble with focus on cardiac only services and the presence was limited to only 2 hospitals across Bengaluru & Kolkata till 2007. Today, Narayana has 47 healthcare facilities with 1 hospital in Cayman Islands. There are 5,770 operational beds catering to 30+ specialities.

The key aspects which draw attention to Narayana’s business are:

Asset right business model: The key differentiator of Narayana is the asset right business model. Narayana ties up with charitable trusts, government bodies and other non profit organisations and these entities invest in the land and buildings connected with the hospitals.

Focus on affordable healthcare: Narayana has brought together quality and affordability. The cost of doing a surgical procedure in Narayana is normally 15-20% lower than its peers as 60-65% bed capacity is normally allotted to general wards.

Steady ramp up of new hospitals: The new hospitals at Dharmshila, Gurugram and Mumbai are ramping up well, with losses coming down. Dharmshila is expected to break even by Q1FY21 while Gurugram and Mumbai are expected to break even in another 18-24 months.

Notable improvement in financial metrics: With no major capex scheduled for the next 24 months and steady ramp up of new hospitals, operating leverage and efficiency should lead to margin improvement and strong free cash flow generation, which should help the Company in debt reduction. All these culminate to strong improvement in ROCE from 7.1% in FY19 to 19.7% in FY22E.

We have valued the stock at 15x FY22E EV/EBITDA to arrive at a Target Price of Rs 442, which provides an upside of 34% based on the current market price. We thus recommend a “Strong Buy” rating on the stock.