Target: ₹780

CMP: ₹686.95

Max Healthcare (MAX) announced the acquisition of a 550-bed hospital, Sahara India Medical, in Lucknow for an enterprise value of ₹940 crore. Considering the performance of Medanta and Apollo Hospital (APHS) in Lucknow, we assume Max to achieve EBITDA margin of 30 per cent over the next 12-18 months.

Accordingly, the 12M forward EV/EBITDA on 12 per cent revenue growth/30 per cent EBITDA margin would be 14x, which is quite attractive compared to the valuation of hospitals in the listed space (~23-26x 12M fwd EV/EBITDA.)

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Further, with just incremental investment of ₹150-200 crpre, the capacity can be increased to 550 beds from the current operating capacity of 250 beds. We raise our earnings estimates by 3 per cent for FY25 to factor in the acquisition.

We value Max on the SOTP basis (26x 12M forward EV/EBITDA for hospital business, 18x EV/EBITDA for MaxLab business and 4x EV/sales for Max@home business) to arrive at a TP of ₹780. This acquisition should help MAX gain foothold in Lucknow and surrounding districts, and give ample land availability to expand at a single location. Further, the scope of growth/profitability improvements makes the acquisition attractive.

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