Buy Narayana Hrudayalaya; target of Rs 2145: Cholamandalam securities

Cholamandalam securities' research report on Narayana Hrudayalaya

Narayana Hrudayalaya Limited (NHL) is one of the best trusted names in super specialty healthcare, having significant market share in cardiology, oncology and nephrology. Dominantly present in East and Southern India. Elective surgery forms the major part of treatment at NHL. COVID induced delays is past now and hospital chain is witnessing fast normalizing of operations with levered operating efficiencies. Well poised to reap benefits of operating leverage and better capacity utilization. It’s the cheapest hospital chain available when compared to peers. It is trading at a PER of 32x (ttm basis) and EV/EBITDA of 24x (ttm basis) as compared to peer set average ~80x PER and EV/EBITDA of 37x which is almost at 50% discount to its peer set. While delivering highest ROE (31.40%) more than twice to peer set (13.22%). We look at Hospital business from the lens of ROE, EV/Per bed, Profit per bed and pay back period per bed and not singularly from ARPOB’s (which to our mind i.e. ARPOB’s is a misleading measuring yard stick). It is here where NHL scores the maximum. Highest ROE, lowest EV/Per bed and Payback period per bed. It has delivered best in class EBITDA Cagr (85%) over FY21 to FY24, and PAT Cagr (52%) over last 2 years. Way better than most of its peers. NHL enjoys strong cash flow, sufficient to take care of guided capacity expansions and capex outlay of around Rs. 4,000 crores over next 3 to 4 years. Benefits of last 10 years hard work has started trickling in. NHL is credited with largest share of Cardiac (grafting) patients while staying low on ARPOB, however still delivering industry beating operating margins. A win-win situation both for patients and hospital’s profitability. It’s a technology focused hospital chain, highly sensitive to patients cost (striving for world class treatment at optimal cost). Faster technology adoption is a key enabler for better operating margins, which not only brings down ALOS but also creates room for more patients to be served. At NHL average length of stay for IPD is about 4.3, a day reduction in same would add roughly 20% capacity to existing facility without laying a brick. Our interactions with management hinted at their highly focused approach for achieving aforesaid.

Outlook

In light of aforesaid triggers we believe, NHL will command a premium of 20% to its projected ROE (26% for FY’27e) in arriving at PER multiple of 31.20x on FY’27 earnings estimate, per share target price comes to around Rs. 2,145 implying an upside of 71% from current per share price of Rs. 1,254.45. We expect this target price to be achieved over next 3 years (i.e by March’27), translating into annual gains of 20% to 24%. Anticipated holding period for above target price is 3 years.