The stock of Bengaluru-headquartered hospital chain Narayana Hrudayalaya has plummeted 31 per cent over the past two months. The stock fell, along with the broader market, owing to rising fears over the coronavirus pandemic.
While the ongoing market volatility warrants caution towards mid- and small-cap stocks in particular, it may be a good idea to keep some sound stocks on the radar (for the long term) in the coming weeks. Narayana Hrudayalaya seems well-poised to deliver healthy earnings growth over the long run, given its brand equity, asset-light model and strong presence in cardiac, renal and other specialities.
At the current price of ₹246, the stock trades at about 31.5 times its estimated FY2020-21 per-share earnings; its healthcare peers Apollo Hospital and Fortis Healthcare trade at 44 times and 41 times their respective FY2020-21 per-share earnings.
Affordable
Narayana Hrudayalaya has a network of 21 hospitals (multi-speciality and super-speciality healthcare facilities), six heart centres (super-speciality units) and 19 primary healthcare centres across 18 locations in India and one multi-speciality hospital in Cayman Islands. It was founded by renowned cardiac surgeon Dr Devi Shetty in 2000. it is recognised as an affordable healthcare provider to the low- and middle-income population.
As on December, 2019, the hospital chain has around 5,770 operational beds and the capacity of up to 6,579 beds. It has a good reputation and strong clinical capabilities in cardiac and renal sciences.
It has been expanding its core speciality areas to include oncology, neurology and neurosurgery, orthopaedics, and gastroenterology.
Region-wise, southern (mainly Karnataka) and eastern (mainly Kolkata) regions together account for 80 per cent of the operating revenues (as on FY19).
The Indian healthcare market is expected to grow at a faster pace, driven by rising income, greater health awareness, lifestyle diseases and increasing access to insurance. Narayana Hrudayalaya is well-poised to benefit over the long run, given its success in providing large-scale, high-quality tertiary care at affordable prices.
Strong business model
The company follows a lease/management contract/revenue-share model (barring RTIICS, Kolkata and NICS Health City, Bengaluru). It invests only in the medical equipment.
For hospital buildings and land, it ties up with charitable trusts, government bodies and other non-profit organisations to set up the hospitals. This has enabled the company to avoid large capital expenditure, improve return ratios and offer healthcare service at affordable cost.
Apart from cardiac and renal sciences, the hospital chain has been strengthening its capability in oncology, neurology, neurosurgery, orthopaedics and gastroenterology. This strategy has helped the company improve its average revenue per operating bed (ARPOB) to ₹90 lakh in FY19 from ₹76 lakh in FY17. Going forward, the management plans to increase ARPOB through more day-care procedures, focus on high-yielding procedures, and attracting more international patients to its Bengaluru, Mumbai and Delhi hospitals.
Further, the hospital’s Average Length of Stay (ALOS) has decreased from 4.3 days in FY16 to 3.6 in FY19. Thanks to newer technologies, lowering the ALOS enables the company to serve more patients with the same infrastructure. This, in turn, improves the profitability.
Ramp-up of new facilities
Earnings and margins for hospitals improve as their maturity profile advances. For instance, margin for the facilities (17 hospitals) with a maturity of over five years stood at 22.7 per cent in the third quarter of 2019-20 for the company. Three new facilities having maturity of less than three years reported negative operating profit.
However, these new hospitals (SRCC, Gurugram, Dharamshila, Delhi) continue to see a reduction in losses due to healthy ramp-up in utilisations. The management expects these hospitals to achieve breakeven (at the EBITDA level) mostly by the end of FY21.
Narayana Hrudayalaya’s net debt-to-equity was 0.5 as on the third quarter of 2019-20. The company has guided for no major capex in the next 24 months.
In the nine months ended 2019-20, the company’s consolidated revenue grew by 14 per cent (y-o-y) to ₹2,385 crore and net profit was up by 386 per cent at ₹107 crore, driven by occupancy improvement, reduction in losses at new hospitals and lower taxes. The operating margin stood at 14.3 per cent during the period.