Narayana Hrudayalaya: Healthy initiatives

The Bengaluru-headquartered hospital chain Narayana Hrudayalaya (NH) seems well poised to deliver healthy earnings growth over the next three to four years.

First, the hospital major has introduced service offerings across multi-specialities such as cardiac, dialysis, oncology and neurosurgery.

Further, it commissioned a 230-bed multi-speciality hospital in Kakriyal, Jammu, in April 2016, revenue for which will start accruing from this year. Also, a few of its hospital projects are likely to be completed within the next nine to 48 months.

The healthcare major bounced back into the black and reported a consolidated profit after tax of ₹19.1 crore in 2015-16 from a loss of ₹16.8 crore in the previous fiscal. Repaying part of its debt helped the company lower its interest cost by 28 per cent during 2015-16. Debt-to-equity has fallen to 0.25 times and is within managable limits. Nonetheless, its earnings were also driven by healthier operational performance, as margins improved.

The company is at a 20 per cent premium on EV/EBITDA of 33 times (earnings before interest, taxes and depreciation), when compared to Apollo Hospitals. But an improvement in hospital maturity profile and occupancy levels can help improve margins and narrow this spread, as earnings grow at a healthy pace.

The stock though has run up after listing and near-term gains can be limited. However, investors with a three- to five-year horizon can still buy the stock of Narayana Hrudayalaya.

Started in 2000, NH treats around 20 lakh patients annually and conducts close to 400 surgeries and procedures daily. As of May 2016, it operates 23 hospitals and clinics in India.

Even as the number of operating beds increased to 5,498 in 2015-16 from 3,815 in 2012-13, the overall bed occupancy rate too improved to 54.2 per cent from 44.9 per cent in the same period.

This has enabled the firm to almost double its inpatient revenue to ₹1,254 crore from ₹670 crore in the same period. As inpatient collections account for a little over three-fourths of total revenue, this trend bodes well for the company.

Also, earnings and margins for hospitals tend to improve as their maturity profile advances. For instance, margins for facilities with maturity of over five years were 23.8 per cent in 2015-16 for the company. Facilities with maturity of three to five years and less than three years reported lower operating margins of 4.1 per cent and 2.9 per cent respectively.

Over the next two to three years, the hospital chain is likely to witness 17 per cent of its beds shift into the over five-year band, improving margins.

The company has also diversified its portfolio of services. Share of therapies such as oncology, neurology and gastroenterology have since grown to 42 per cent from 32 per cent in 2012-13.

During 2015-16, consolidated revenue from operations grew 18 per cent Y-o-Y to ₹1,607.5 crore. A 10 per cent increase in average revenue per operating bed, a 31 per cent rise in total surgeries and 3 per cent increase in inpatient volumes were the main drivers.

EBITDA margin too improved to 11.6 from 9.5 per cent during this period. Performance for the quarter ending June 2016 has been encouraging. Operating revenue rose 19 per cent Y-o-Y and margins improved to 12.2 from 9.7 per cent.

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