Budget 2023-24 allocated 0.33 per cent of GDP to public healthcare and strengthened peripheral services; Nurses training programme, universal health insurance, and generic pharmacies. This implies that private healthcare providers will continue to be the main draw for patient care in India.

Narayana Hrudayalaya (Narayana) is amongst the leading hospital operators in the country with 6,490-bed capacity; spread across the country and with one facility in Cayman Islands serving the Caribbean market and potential access to North America. Narayana, with a focus on low-cost asset light model and reputed practice, is reasonably positioned to capture the secular growth in the Hospital industry. We recommend that investors can accumulate the stock, which is trading at 27 times FY24 earnings but at a discount to peers.

Low-cost diversified model

Narayana uses a mix of owned (three facilities out of 21) and managed facilities to cap operating costs. Against an industry standard of ₹50-₹60 lakh per bed to set up, Narayana reports a capital cost per operational bed of ₹39 lakh as on Q2FY23. The company, founded in 2000, is fairly diversified geographically. In India, Narayana generated 36 per cent of Q2FY23 revenues from Bengaluru, 26 per cent from Kolkata, 17 per cent from Northern India, 10 per cent from the East and 11 per cent from other regions. The Cayman unit with 110 beds out of 6,490 has been operating for eight years and accounts for 19 per cent of the consolidated revenues.

Growth drivers

Even as the low-cost operator exhausted cost savings methods for patients, Naryana’s ARPOB (Average revenue per operating bed) grew at 5 per cent YoY in the trailing one year and a similar industry level growth can be expected in the future as well. Narayana average revenue per patient and length of stay indicated an ARPOB of ₹24,578, which is at the lower end of industry range. Apollo Hospitals reported ₹40,000 at the higher end and KIMS reported ₹21,000 in the recent quarter.

An improving product mix will support realisation growth as well. Cardiac care accounts for 35 per cent of revenues, followed by gastro, onco, renal and neurosciences (13/14/9/7 per cent respectively). Narayana is strengthening oncological services in new hospitals (Jaipur, Ahmedabad and Mysore) along with flagship (Bengaluru, Kolkata and Cayman) and growing hospitals (Gurugram, Mumbai and Noida), which should further increase ARPOBs. Maintenance capex focussed on new machinery in the next two years should reduce the length of stay, improving turnaround rate as well. Caymans reported a stronger bounce-back in the similar ARPOB measure ($4,300 per day) as the comparable periods had longer Covid restrictions.

With pricing growth supporting 5-6 per cent YoY growth, high single-digit revenue growth can be expected at the top line with marginal 2-3 per cent volume growth contribution in the next two years. The next round of growth is from significant capex, which will commercialise in more than two years.

For the immediate period, volume growth can be expected from a combination of marginal improvement in occupancy and bed addition. Narayana’s occupancy (based on revenue and ARPOB) has reached 68 per cent in both India and Cayman by Q2FY23 from 61 and 57 per cent a year earlier. We expect only a marginal improvement from here to 70 per cent as even the new facilities have ramped closer to optimal capacity utilisation. Since Covid, Narayana has added a net of 28 beds per quarter (.5 per cent of capacity) and can be expected to sustain it. The main expansion is in the form of brownfield where land is available, mainly led by Cayman where the extension is under way. Greenfield expansion will be focussed on Kolkata and Bengaluru. Narayana intends to implement a capex of ₹2,000 crore spread over FY23-24 in brown and greenfield additions, including land acquisition where needed, primarily Kolkata. But the contribution will only be realised in the longer term.

Financials

Narayana reported an EBITDA margin of 20.5 per cent in the trailing twelve months. This is a step up from 13-15 per cent reported pre-Covid and is on the back of near breakeven margins from the new cluster (Gurugram, Mumbai and Noida). The flagships, Bengaluru and Kolkata, reported 26 per cent EBITDA margins in Q2FY23 and consolidated profitability will improve as new facilities move from breakeven to positive margins but offset by new bed additions. As of September 30, 2022, Narayana has a total debt of ₹725 crore and net debt to EBITDA ratio of 0.9x. But the currently low debt metrics might inch up as capacity addition will be based on internal accruals and debt.

Overall, supported by pricing growth of the industry, improving profitability of Naryana and small volume growth contribution, Narayana trading at 27 times FY24 earnings can be accumulated. The large volume addition execution in the next two-three years will be the next trigger for the company.

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