Weekly Tactical Pick: This turnaround specialist in healthcare is putting macros to work

Highlights

• The hospital segment seeing Improved operational metrics
• Increased awareness and a pick-up in electives supporting the earnings outlook
• KIMS — a regional healthcare service provider is expanding to adjacent regions
• An excellent record of turning around acquired facilities in the past
• Valuation, post the recent consolidation, is at a discount to peers

The global investment landscape has limited options to look at because of  varied macro risk factors — energy crises, war, de-globalisation, hawkish central banks, and fears of recession. However, there are a few regions having a comforting macroeconomics context. India is one such economy having a favourable domestic consumption and policy backdrop. Among the domestic-focused sectors, the hospital business garners attention due to the enhanced institutional healthcare awareness, courtesy the COVID pandemic. Moreover, there is a pickup in footfalls for elective surgeries in recent times, aiding the  operational metrics.

In this context, our tactical pick for this week is KIMS (Krishna Institute of Medical Sciences Limited, Mkt cap: Rs 11,364 crore, CP: Rs 1,419, Nifty: 18,415). KIMS is a regional healthcare service provider in Andhra Pradesh and Telangana, having an excellent record of turning around acquired facilities in the past.

In the next few years, KIMS plans to replicate the success in the adjacent states of Central India, Maharastra, and Karnataka. Some of the nearby regions are already aware of the KIMS brand. KIMS is setting up hospitals in Nashik and Bengaluru where about 400 beds will be added in 18 months. The acquisition of Kingsway (Nagpur) and Sunshine (Hyderabad) hospitals has already increased bed capacity by ~1000 in H1 FY23, taking the total bed capacity of the group to 4,015.

In addition, KIMS is executing brownfield expansions in Kondapur, Anantpur, and Vizag, which should be over in the next 2-3 years. Oncology is seen as the biggest focus area for these expansions & incremental investments.

What adds to the comfort is the lean balance sheet and the annualised cash flow of around Rs 400 crore. The key catalyst to watch in the near term is the potential to improve the operational performance of the recently acquired hospitals of Sunshine and Kingsway that operate at 18 percent and 10 percent EBITDA margins respectively. Given that matured assets of KIMS operate at 30 percent EBITDA margins, there is scope for improvement.

The recent quarterly results were also comforting with a sequential improvement in footfalls. The ARPOB (average revenue per occupied bed), however, moderated marginally and stood at Rs 29,200 and remains a key factor to be watched.

After a 12 percent decline from the recent highs, the stock is trading at an EV of 15x FY24e EBITDA, which is at a discount to peers. In addition, a pick-up in institutional interest (both DIIs & FIIs) also adds to the comfort. We believe the stock presents an opportunity to play on the growth possibility of healthcare services in the hinterland, given the limited institutional facilities.