Aster DM Healthcare’s (Aster) Q2FY22 performance was above our estimates mainly at the profitability front driven by strong occupancy in India hospitals. Consolidated revenue grew 10.4% YoY to Rs25.0bn (I-Sec: Rs24.3bn), 2-year CAGR of 9.5%. EBITDA margin improved 170bps YoY to 13.7% (I-Sec:12.0%) with occupancy recovery. We expect overall business to continue to recover and margins to improve with reducing contribution of COVID-19 patients. We believe the company’s approach of asset-light expansion and an improving margin trajectory (300bps over FY21-FY23E) would aid positive FCF generation. The company is aggressively focusing on capacity addition in India. While we remain positive on the stock, recent run up has factored in near term upside, hence we downrange to ADD from Buy with a revised target price of Rs226/share.
Business review: Revenue grew at 2-year CAGR of 9.5% led by 11% growth in GCC hospitals and 18.9% in India hospitals. Indian growth was driven by rise in occupancy to 70% vs 58% YoY. Occupancy at GCC hospitals was up to 51% vs 49% QoQ and is expected to improve gradually with increasing footfalls. GCC Clinics business grew 13.6%, 2-year CAGR amid continuous gaining traction from COVID-19 testing, but Pharmacy business declined 2.2% due to lower footfalls which expected to improve in coming quarters. EBITDA margin improved 170bps YoY to 13.7% against our estimate of 12.0%. This was primarily on account of occupancy improvement in India which lifted India margin by 840bps/300bps YoY/QoQ. We estimate EBITDA margin to rise to 15.3% by FY23E.
Key Concall Highlights: 1) Strategic decision in next 3 months for a) unlock domestic business b) Pursue Cayman expansion or not and c) probably exit from Saudi 2) Guided for Rs5.8bn of annual capex for next 2-3 years,~Rs2bn of maintenance capex and Rs2.5-3bn capex for India 5) adding 300-350 beds in existing hospitals of Kerala in next 2 year, however Chennai greenfield expansion has put on hold 6) looking to foray in e-pahrmacy in UAE in Q4 and in FY23 in India 7) the company is aggressively looking diagnostic expansion in India
Outlook: We expect Aster to report 15.9/28.8/129% revenue/EBITDA/PAT CAGRs, respectively, over FY21-FY23E largely driven by the hospital business. RoE/RoCE expected to gradually improve to 18.1%/10.8% by FY23E. It is looking to aggressively expand its bed capacity in India. The management highlighted that they may consider separating GCC and India businesses in near term to create shareholders value.
Valuations: We marginally tweak our estimates and expect growth recovery to continue. We raise target multiple of GCC clinics to 8x and of India hospital business to 14x to factor in the improved growth visibility in the segments. However, recent run up has factored near term triggers, hence we downgrade to ADD from Buy with a revised SoTP-based target price of Rs226/share (earlier: Rs193/share). Key downside risks: Regulatory hurdles, additional waves of covid-19 in India and delay in turnaround of new hospitals. For full report please click here.