Company Name – Narayana Hrudayalaya Limited (NH)
Current Share Price – INR 743 (November 30, 2022)
Market Cap – INR 15,178 cr
1. What is interesting about the stock?
“Simplification is one of the most difficult things to do” … Jony Ive
Working closely with Steve Jobs during their tenure together at Apple, Ive played a vital role in the designs of the iMac, Power Mac G4 Cube, iPod, iPhone, iPad, MacBook, and parts of the user interface of Apple's mobile operating system iOS, among other products. One of the best parts of Apple products is its simplicity of design.
What’s the connection between simplification and NH?
Dr. Devi Shetty, the founder of NH, has made even complex cardiovascular procedures simple and akin to a factory assembly line, which increases the number of operations per doctor per day while reducing the cost of the doctor as the procedure would not need “star” doctors. This leads to better procedure quality and lower cost, which is passed on to the patients. NH has an ARPOB (average revenue per operating bed or a measure of cost for a patient) 30-40% lower than the competition.
Narayana Hrudayalaya Limited is a healthcare service provider that operates a chain of multi-specialty hospitals in India and the Cayman Islands. NH has a network of 44 healthcare facilities including 19 owned/operated hospitals (multi-specialty and super-specialty healthcare facilities which provide tertiary care), 2 managed hospitals, 4 heart centers (super-specialty units which are set up in a third-party hospital), and 19 primary care facilities (including clinics and information centers). Company has a 6,490-bed capacity with ~6,150 operational beds and 30+ specialties. The Company has a strong track record of providing quality healthcare services at an affordable cost. NH was founded by Dr. Devi Shetty in 2000 and is headquartered in Bengaluru. The Company has an established presence and strong brand recognition in two geographical clusters, southern (Karnataka) and eastern India (which account for ~80% of its revenues in Q2FY23), with some presence in western, central, and northern India (especially in Tier I cities). The Company has established a strong position on Cayman Island, where it is planning to set up an additional multi-specialty center and an oncology unit. NH had started the Cayman Island unit to provide affordable quality care to US patients but that hasn’t panned out as planned, and the Company is now focusing on addressing the local needs.
The asset-light model has enabled the company to have one of the lowest average effective costs per bed among its peers. The average effective capital cost per operational bed is INR 33 lakh vs the Industry average of INR 1 cr for Tier 1 city and INR 50 lakh for Tier 2 city.
NH’s centers provide advanced levels of care in over 30 specialties, including Cardiology and Cardiac Surgery, Cancer Care, Neurology and Neurosurgery, Orthopaedics, Nephrology and Urology, and Gastroenterology. Company was predominantly focused on Cardiology in FY13 with 62% of revenue and has subsequently diversified with its revenue coming down. The mix of revenues from various specialties in Q2FY23 is:
Cardiac – 35%
Gastro – 13%
Oncology - 14%
Renal – 9%
Neuro – 7%
Ortho – 4%
Others – 17%
Cayman Islands contributed to ~20% of revenue in Q2FY23. Indian operations cluster-wise revenue mix in Q2FY23:
South - Bangalore: 37%, Others: 7%,
East - Kolkata: 27%, Others 10%
The industry is expected to grow at a CAGR of 17% during the period 2018 to 2025. I would expect NH to grow at a CAGR of 15-20% for the next few years driven by:
Industry-wide factors like economic development leading to more lifestyle-related ailments, population aging, and an increase in affordability (rise in per capita income and health insurance levels)
Increase in occupancy levels as the recently opened hospitals mature
Medical tourism to come back after international travel becomes easier, post COVID-19
Dr. Shetty is the chairman and founder of NH. He has performed more than 16,000 heart operations. In 2004 he was awarded the Padma Shri, the fourth-highest civilian award, followed by the Padma Bhushan in 2012, the third-highest civilian award by the Government of India for his contribution to the field of affordable healthcare. The Wall Street Journal newspaper has described him as "the Henry Ford of heart surgery". Surgeons in his hospital perform 30 to 35 surgeries a day compared to one or two in a US hospital.
Strengths (Why invest in NH?)
Strong brand equity of Dr. Shetty
Asset light model – Company can roll out faster with lower capex per bed. NH also looks for alliances like Heart Centers where all capex is funded by the owner and operator. This model is quite similar to the franchisee model in the hospitality industry
High ROE (~25% in FY22) even at a low occupancy level of ~50%. A jump in occupancy level will lead to higher ROEs
Robust financial position (high ROE, low D/E ratio of 0.3x, low working capital)
A lot of competition in the industry from large players like Apollo, and Fortis and other players like Max, Manipal, HCG, KIMS, Medanta, etc
Execution risk in the new projects or ramping up of recently opened hospitals
High dependence on leases – a side effect of having an asset-light approach. Any disruption (discontinuation or increase in lease rent) can create challenges for the business
2. Key Historical Financials
Revenue jumped 43% in FY22 on a low base in FY21 which was impacted by COVID-19. Revenue increased by 21% in Q2FY23 on a YoY basis
EBITDA margin has been stable at around 17-19% in FY22 and jumped to ~20% Q2FY23
Occupancy recovered in the last few months as reflected in TTM results – pent-up demand for elective surgeries has led to the occupancy level of ~50% vs the typical ~49% in FY17-20. This has partly led to higher EBITDA margins (TTM EBITDA margin at 18% vs FY20 at 14%)
CFO/EBITDA has been down to 75% in FY22 vs 100%+ in FY19/FY20
Cash Flow Analysis
NH has been doing a capex of ~INR 100-200 cr over the last few years which has been fully funded from internal accruals. The Company took a loan to fund the balance stake acquisition in the Cayman Islands' hospital in FY18 that it has been paying down over the last 2-3 years. Company has announced an expansion in Cayman (~ USD 100mn) for the 50-bed facility which would focus mainly on providing oncology, critical care, and daycare services. The Company will be spending INR 2,000 cr capex in the next couple of years, which would be funded from internal accruals – annual EBITDA of around INR 600-700 cr based on the current run rate and CFO/EBITDA ratio of ~100% and remaining from debt.
3. What is my view on company valuation?
Company share price has jumped ~2.4x in the last three years with PAT increasing by ~3.2x (FY20 – INR 119cr to TTM – INR 446cr). So, the share price increase has been supported by fundamentals.
NH trades at a P/E (TTM) multiple of ~34x vs Apollo at 81x, Fortis at 47x, Max Healthcare at 46x, and KIMS at 38x. Valuation compared to peers seems reasonable.
As the company’s business fundamentals are strong and ROE is quite attractive with negative working capital and an asset-light model, We can use a PEG ratio of 2x. If the revenue grows at a 15-20% rate for the next few years and the margin remains stable, the PAT can grow at ~17.5% implying a P/E ratio of 35x. With some margin of safety, stock can be evaluated at a P/E (TTM) of ~30x.
Company looks very interesting for the long term and investors can evaluate entering at lower levels.
4. What are the risks to the investment analysis?
Risks to the analysis are:
New COVID-19 wave can disrupt the operations
Forex exchange rate risk for ~20% of the business (Cayman Hospital)
The regulatory risk from changes in government policies – The National Pharmaceutical Pricing Authority (NPPA) imposed a ceiling price on coronary stents in February 2017. This impacted the Company’s profitability
Recruitment and retaining medical talent – India has a scarcity of medical talent in terms of quantity and quality. Competition could pose a challenge in recruitment and retaining such talent
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have had stock, option, or similar derivative positions in any of the companies mentioned in the last 30 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.