After listing at a premium of 19 percent at ₹401 on November 16, the healthcare stock Global Health (Medanta) has managed to jump another 14 percent in a little over a month to currently trade around ₹458. From its issue price of ₹336, the stock has surged 36 percent.
The ₹2,206-crore initial public offering of Global Health opened for subscription on November 3 and closed on November 7. The company had fixed the IPO price band at ₹319-336 per share.
Over a month after listing, global brokerage firm Jefferies has initiated coverage on the healthcare provider with a buy call and a target price of ₹550, implying a potential upside of 20 percent.
"Medanta is a top-notch healthcare provider with strong brand equity achieved through clinical excellence. It's strong positioning in North India along with expansion in underserved areas like Lucknow and Patna should drive 17 percent revenue CAGR along with 70 bps margin expansion over FY22-25E. We believe Medanta will close the valuation gap with peers, helped by EBITDA growth and ROCE trajectory," explained the brokerage.
It further noted the steady operation of mature hospitals and new hospitals in Lucknow and Patna hospitals to scale up by increasing operational beds. Patna's hospital will break even (EBITDA) in FY24 and continue to scale up. Flagship hospital in NCR to gain from price hikes, increase in international patients, and increasing occupancy, stated Jefferies.
Bull and bear case scenarios
In the base case scenario, which has a TP of ₹550, the brokerage forecasts 1) FY25E occupancy at 66 percent, 2) FY25 Average Revenue Per Occupied bed (ARPOB) at ₹59,555/day, 3) FY25E EBITDA Margin at 21.6 percent, 4) value Medanta EV at 20x FY25E EBITDA.
BULL CASE: The brokerage has a target price of ₹653 in its bull case scenario which implies a potential upside of over 40 percent. In this, the brokerage forecasts 1) FY25E occupancy at 67 percent, 2) FY25 Average Revenue Per Occupied bed (ARPOB) at ₹61,938/day, 3) FY25E EBITDA Margin at 23 percent, 4) value Medanta EV at 21x FY25E EBITDA.
BEAR CASE: The brokerage has a target price of ₹369 in its bull case scenario which implies a potential downside of 18 percent. In this, the brokerage forecasts 1) FY25E occupancy at 62 percent, 2) FY25 Average Revenue Per Occupied bed (ARPOB) at ₹56,578/day, 3) FY25E EBITDA Margin at 62 percent, 4) value Medanta EV at 18x FY25E EBITDA.
Investment rationale
Strong brand equity: Led by Dr Naresh Trehan, a renowned cardiologist, Global Health Ltd (Medanta) is amongst the top private hospitals in North India, specializing in cardiology and cardiac science, neuroscience and oncology. It has adopted a 'doctor-led' model of management, comprising over 1,100 doctors, which has led to high clinical excellence and created strong brand equity. Medanta's flagship hospital in Gurugram (Delhi/NCR region), called 'The Medicity', has won numerous accolades, said the brokerage.
Strong execution at the flagship hospital and well-planned regional expansion: As per brokerage, Medanta's mature hospitals (called GHL) comprising facilities of Gurugram, Indore and Ranchi accounted for 81 percent of its revenue and 77 percent of its total operational bed capacity in FY22. Over the last three years, Medanta has expanded its network to cities like Lucknow and Patna, which are underserved and have dense populations, it added. Jefferies expects a 17 percent CAGR in revenues over FY22-25E, led by the ramp-up of Lucknow and Patna hospitals along with steady growth from mature hospitals.
It further added that Medanta's expansion into Central and East India along with a 550-bed expansion underway in Noida (phase- I to be commissioned in FY25) should de-risk it from any adverse policy decisions impacting Delhi/NCR region.
Ebitda to grow faster than revenue: Medanta's mature hospitals demonstrate a steady margin profile, while its new hospitals in Lucknow and Patna are expected to ramp up strongly and drive overall Ebitda CAGR of 18 percent over FY22-25E, surpassing revenue growth, predicted the brokerage.
Medanta is comparable to peers on most parameters: Medanta’s ARPOB is second only to Max Healthcare's, and its EBITDA margins are largely in line with those of other hospital groups, informed Jefferies. Its margin profile should remain largely stable despite a decline in the contribution of high-margin cash patients as new hospitals ramp up, the brokerage forecasted. Medanta’s ROCE should move upwards as asset utilization across hospital assets improves, added the report.
Initiating with a buy
The brokerage likes Medanta’s strong clinical excellence reputation and growth visibility via its new facilities in Lucknow and Patna. It values Medanta at 20x FY25E EV/EBITDA, which is at a 9 percent/7 percent discount to Max/Apollo trading multiples, as it believes the company will bridge the current valuation gap with peers on strong EBITDA growth, robust balance sheet and improving ROCE profile.
It further highlighted that Medanta is all set to be net debt-free by FY24 as it will use ₹375 crore of the ₹500 crore IPO proceeds to repay its existing debt. As of FY22, Medanta’s net debt/EBITDA (including lease
liabilities) was at 1.3x. Debt repayment and healthy cash flow generation should keep the balance sheet robust, and Jefferies believes Medanta will be able to fund its capex with internal accruals.
Although Medanta's ROCE is lower vs peers, Jefferies sees its ROCE will be on a rising trajectory as asset utilization across various facilities goes up.
Key risks: a) High dependence on Chairperson Dr Naresh Trehan, b) increasing competition in the Delhi-NCR region.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
