Hospitals

SECTOR UPDATE
Expansion done and consolidation on;
re-rating ahead?

11 July 2019 BSE Sensex: 38721

Listed Indian hospital services companies within our universe have shifted gears into a likely prolonged
consolidation phase, post intensive capital expenditure, which entailed significant capacity additions.
Management commentaries point to limited or no incremental capex, with no new hospital units being
set up over next two years. Managements would instead focus on sweating out mature hospital units
and turning around relatively new hospitals, driving accelerated earnings growth over FY19-21E. Given
the sharp reduction in future capex outlays, we estimate most listed hospital units would generate
positive free cashflows (FCF), sharply improving return ratios over the next 2-3 years. Managements
stated their intent to sustain focus on profitability/return ratios, which we believe will help address key
investor concerns in the healthcare services space. On the regulatory side, while concerns on
incremental action around price control stay, this time around, hospital networks are better prepared to
mitigate any negative impact on them, than they were when price control on stents was announced. We
see limited impact from implementation of Ayushman Bharat on listed hospital networks. Prices of
stocks within our coverage have corrected by ~14% in last 3 years due to companies’ weak operating
performances and heightened regulatory risk. However, valuations are now reasonable at ~13x FY21E
EBITDA, given strong near-term growth visibility and long-term growth outlook. Apollo Hospitals
(Target price – Rs1629) and Narayana Hrudayalaya (Target price – Rs270) are our top picks.

Indian healthcare services – A heady expansion phase ends: Buoyed by secular growth narrative for
private sector healthcare services, hospital networks in India embarked on an aggressive expansion phase
FY14 onwards. As a result, companies ventured into new geographies, especially in Tier 2/3 towns,
through a combination of buyouts, greenfield capacity additions and asset-light expansion strategies. For
instance, Apollo added 14 new hospitals over last 5 years. However, most hospital operators found it
difficult to successfully scale up these Tier 2/3 units due to challenges in hiring adequate medical talent
and generating adequate footfalls of paying patients, causing the break-even period of these units to
stretch. This adversely impacted consolidated profitability and return ratios of hospital networks (most
hospital networks have now reoriented their strategies to limit future investments into Metro/Tier 1
towns). Additionally, regulatory shocks from price caps on stents/implants and growing negotiating clout
of health insurers, which impacted growth/ profitability of mature hospitals added to the chaos of private
sector hospital service providers in FY17-18. Hospital networks have now slammed brakes on future
expansions and refocused on improving profitability of existing networks. Results are evident from the
marked improvement seen in profitability of Apollo and NH in FY19.

Consolidation is the mantra going forward: Our discussions with various hospital management teams
indicate clear focus on sweating existing assets, optimizing costs across the network and enhancing
profitability. With abatement of macro issues like GST implementation, revenue and profitability growth
of mature hospitals have begun to recover, with networks focussing on measures like case mix
optimization, in addition to enforcing cost discipline. Further, there is wide variation in unit-level
profitability across networks, with well-established mature hospitals operating at 25%+ operating
margins, and the <5-year old hospitals struggling at <10% EBITDA margin. Although we believe new
hospitals are unlikely to match profitability of top tier hospitals, managements see scope for significant
improvement from current levels, albeit gradually. This improvement would provide opportunity to newer
hospitals to meaningfully enhance EBITDA contribution in the coming years.

Sector M&A activity will accelerate the consolidation process: Challenges in the listed hospital universe
reflect profitability pressures across the entire industry. Heightened M&A activity over last few years, with
some large hospital networks changing hands reflect this trend (Buyout of Max Healthcare by
Radiant/KKR and of Fortis by IHH are few examples). In our view, these large-ticket buyouts will likely
prompt buyers to focus on optimising existing networks before embarking on ambitious expansion plans.
This, in turn, will likely limit capacity expansions across the sector and help rationalise costs associated
with hiring/retaining doctors. Notably, hospitals’ race to expand over the years has induced significant
inflation in medical talent costs (a relatively scarce commodity), which, in turn, has exerted significant
downward pressure on profitability across hospital networks. We believe this cost discipline will create a
stronger growth platform for hospital network operators over the medium-long term.

Nitin Agarwal Nirmal Gopi

nitin.agarwal@idfc.com nirmal.gopi@idfc.com
91-22-4202 2568 91-22-4202 2552

For Private Circulation only. “Important disclosures appear at the back of this report”
 Hospitals

Indian hospital services: Aggressive expansion - a dampener

Since FY14, Indian hospitals have been on an aggressive expansion mode, attracted by increasing
potential of relatively untapped Tier 2/3 markets and an ageing Indian population. The Exhibit below
lists the commissioning of new hospitals by 6 large listed Indian healthcare companies. Overall, these
listed hospital groups have added nearly 10,000 beds over last 5 years. Cumulatively, these groups have
a capacity of ~29,250 beds, implying ~33% of capacity added in a relatively short span of 5 years.
Exhibit 1: New hospitals commissioned over last five years…
Apollo Fortis HCG NH Shalby Aster DM

Location Beds Location Beds Location Beds Location Beds Location Beds Location Beds Total
Vanagaram,
FY14 300
Chennai
Jayanagar, 700
150
Bangalore
Trichy, TN 250
Ameerpet, 158
FY15 OMR 200 Ludhiana 260 Trichy 35
Hyd
Aster 670 2063
Women & Child Fortis La
100 70 Medcity,
care FMR Femme
Kochi
Women & Child
70
care OMR
Nellore 250
Nashik 250
FY16 Malleshwaram 230 Gulbarga 85 Jabalpur 233
Vizag 250 Indore 243 1186

Mohali 145
Wayanad, 880
FY17 Indore 200 Vizag, AP 88 Jammu 230 Mumbai 50
Kerala
Vadodara, Guntur 350 2645
Navi Mumbai 450 69
Gujarat
Kanpur, UP 90 Vijayawada 184
Vijayawada 54
SRCC,
FY18 Guwahati 200 Nagpur 125 207 Jaipur 237
Mumbai
Delh-NCR 1734
Borivali 105 (Dharamsh 350 Ahmedabad 267
ila)
Surat 243
FY19 Lucknow 250 Jaipur 50 Gurgaon 230 Ongole, AP 150
Kannur, 302 1194
Bhavnagar NA
Kerala
Nashik
92
Phase II
Rajkot 120
Total
3150 330 859 1017 1418 2748 9522
beds
Source: Company, IDFC Securities Research

The expansion entailed sustained high capex levels and negative FCF generation for most players
during this period.

2 | IDFC SECURITIES 11 July 2019

 Hospitals

Exhibit 2: …led to high capex…

(Rs m) FY14 FY15 FY16 FY17 FY18 FY19
Apollo 5,958 8,655 10,159 6,735 6,214 7,139
Fortis 6,002 2,435 2,299 2,776 1,801 600
NH 1,288 982 905 1,350 2,037 1,710
HCG 674 802 2,103 1,927 2,562 2,687
Source: Company, IDFC Securities Research

Exhibit 3: …and considerable increase in net debt...

(Rs m) FY14 FY15 FY16 FY17 FY18 FY19
Apollo 9147 14694 22136 24519 33000 35121
Fortis 13087 16488 6655 10377 8457 9702
NH 3050 2756 2113 1606 7663 7129
HCG 2799 3643 2717 3464 4156 6069
Source: Company, IDFC Securities Research

Exhibit 4: …causing net debt/EBITDA to worsen

(x) FY14 FY15 FY16 FY17 FY18 FY19
Apollo 1.4 2.0 3.2 3.4 4.2 3.3
Fortis 7.1 12.3 3.3 2.9 3.1 4.3
NH 2.5 2.1 1.2 0.7 3.6 2.5
HCG 7.4 5.0 3.2 3.3 3.5 4.8
Source: Company, IDFC Securities Research

Unfortunately, at the time of these expansions, the industry underwent a challenging environment, as
the government imposed price caps on stents/implants in 2017 and introduced various healthcare
schemes. Growing negotiating clout of health insurers and increasing competition in Tier-1 metros,
exacerbated by long breakeven periods of new hospitals (~3 years to breakeven and 5 years to achieve
profitability of mature hospitals) further added to the pressures, causing margins and thereby, return
ratios to reduce.

Exhibit 5: A myriad of challenges

Growing
negotiating
power of Increasing
health insurers competition in
tier-1 metros

Challenging operating
environment for hospitals

Aggressive expansion +
3 year breakeven period Price controls
for new hospitals on coronary
stents & knee
implants

Source: Company, IDFC Securities Research

Exhibit 6: Operating margins came under pressure during this phase…

EBITDA CAGR
EBITDA Margin (%) FY14 FY15 FY16 FY17 FY18 FY19
FY14-19
Apollo 15.3 14.2 11.1 10.0 9.6 11.1 9.6%
Fortis 3.9 3.2 4.9 7.7 6.0 5.0 3.7%
NH 11 9.5 10.8 12.2 9.3 10.1 19.1%
HCG 8.4 14.1 14.5 15 14.3 12.6 27.1%
Source: Company, IDFC Securities Research

3 | IDFC SECURITIES 11 July 2019

 Hospitals

Exhibit 7: …hampering return ratios

RoCE (%) FY15 FY16 FY17 FY18 FY19
Apollo 9.9 7.0 6.1 5.7 8.1
Fortis -1.9 -0.3 1.8 0.4 -0.1
NH 6.1 8.8 12.8 7.3 7.7
HCG 6.2 5.6 5.4 4.8 3.4
Source: Company, IDFC Securities Research

All these caused valuations to de-rate across the entire hospital universe. Almost all hospitals
significantly underperformed Nifty 50 over FY17-19, once expansion-driven challenges came to the fore.

Exhibit 8: NH - 1-year forward EV/EBITDA Exhibit 9: HCG - 1-year forward EV/EBITDA

NH - EV (Rsm) 11.5 HCG - EV (Rsm) 13.6
17.5 23.6 17.4 21.2
120,000
29.6 25.1
45,000
90,000 36,000

27,000
60,000
18,000

30,000 9,000

0
0
Mar-16

Mar-17

Mar-18

Mar-19
Sep-16

Sep-17

Sep-18
Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Source: Company, IDFC Securities Research Source: Company, IDFC Securities Research

Exhibit 10: Apollo - 1-year forward EV/EBITDA

Apollo - EV (Rsm) 5.7 8.6 14.3 20.0
300,000

225,000

150,000

75,000

0
Mar-10

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16
Mar-11

Mar-17

Mar-18

Mar-19
Mar-02

Mar-03

Mar-04

Mar-05

Mar-06
Mar-01

Mar-07

Mar-08

Mar-09

Source: Company, IDFC Securities Research

Exhibit 11: Relative performance of hospitals versus BSE Healthcare and Nifty 50
Apollo Hospitals Enterprise Narayana Hrudayalaya Ltd Healthcare Global Enterprise
Fortis Healthcare Ltd S&P BSE Healthcare Nifty 50
220

175

130

85

40
Jul-16

Feb-17
Mar-17

Feb-18
Mar-18

Feb-19
Mar-19
Jan-18

Jul-18

Jan-19

Jul-19
Oct-16

Dec-16
Jan-17

Jul-17

Oct-17

Dec-17

Oct-18

Dec-18
Aug-16

Nov-16

Apr-17
May-17

Nov-17

Apr-18
May-18

Nov-18

Apr-19
May-19
Jun-17

Aug-17

Jun-18

Aug-18

Jun-19
Sep-16

Sep-17

Sep-18

Source: Bloomberg

4 | IDFC SECURITIES 11 July 2019

 Hospitals

 Heightened M&A activities underline the growing competitive pressures

Heightened M&A activities in the industry confirm the challenging operating environment for hospitals
over the last few years. Due to a dent in profitability and increased competitive intensity, several Indian
promoter families exited by selling stakes to international investment firms and major healthcare companies.

Exhibit 12: M&A hospital deals in last 5 years

Deal value
Company Acquirer Date
(US$ m)
Cancer Treatment Services International Varian Medical Systems May-19 283
Nova IVI Fertility Asia Healthcare Holdings (TPG Capital) May-19 72
International Hospitals Ltd (RHT Health Trust) Fortis Healthcare Jan-19 658
Max Healthcare (49.7% stake) Radiant Life Care 17-18 505
Radiant Life Care KKR Dec-18 365
Medall Healthcare Constellation Alpha Capital Corp Aug-18 198
Fortis Healthcare (57.3% stake) IHH Healthcare Jul-18 1245
Kalinga Hospital BRS Ventures Feb-18 23
Saket City Hospital Max Healthcare 15-17 379
Kerala Institute of Medical Sciences True North & GIC Mar-17 250
Quality Care Hospitals Abraaj Capital Jan-16 195
Ravindranath GE Medical Associates (73.4% stake) IHH Healthcare Aug-15 194
Pushpanjali Crosslay Hospital Max Healthcare May-15 45
Narayana Health CDC Group Jan-15 48
Manipal Health (24.75% stake) TPG Capital Jan-15 150
Continental Hospitals IHH Healthcare Mar-15 45
Westbank Hospital Narayana Health Nov-14 24
Max Healthcare Institute Life Healthcare Group Aug-14 126
SK Soni Hospital Manipal Health Feb-14 NA
Source: IDFC Securities Research

Playing field for hospital services changing – time to consolidate

While the medium-long term potential of Indian healthcare services and opportunities for private sector
healthcare network providers remain broadly intact, profitability pressures combined with balance sheet
challenges have prompted a rethink on the aggressive expansion strategies across the listed universe.
Most listed hospital groups have dramatically scaled down their expansion plans and are now focussing
on consolidating their existing networks.
Based on management commentaries, we expect fairly limited new capacity additions across the Indian
healthcare universe, at least over the next 2-3 years. Multiple hospital networks have undergone
promoter/management changes in last couple of years, and there is a likely imperative for new
managements to consolidate these networks before committing aggressive capex spends. We expect
these factors to further strengthen the consolidation trend.

Exhibit 13: Limited expansion pipeline over next 2 years

FY20E FY21E Total
Company Location Beds Location Beds beds
Apollo - - - - 0
Fortis Arcot Road, (brownfield expansion) 250 - - 450
BG Road (brownfield expansion) 200
HCG Kolkata 50 Delhi 95 277
South Mumbai 32 Kochi 100
NH - - - - 0
Shalby Nashik 113 113
Aster DM Bangalore 223 Chennai 500 783
Kolhapur, Maharashtra 60
Total beds 815 808 1623
Source: Company, IDFC Securities Research

5 | IDFC SECURITIES 11 July 2019

 Hospitals

Exhibit 14: From a peak in FY17, capacity additions are expected to taper meaningfully across the industry

Addition of beds
3,000

2,250

1,500

750

0
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
Source: Company, IDFC Securities Research

We believe the slowdown in new planned capacity additions will have a multi-pronged positive impact
on the financials of listed hospital universe, as it coincides with the progressive improvement in the
external regulatory environment. We expect strong improvement in profitability, combined with balance
sheet strengthening over next 2-3 years across the universe.

On the regulatory front, while risk of further government action on price controls over larger set of
consumables persists, this time around, hospitals are much better placed to handle any such proposed
move. Further, hospital financials have overcome demonetization and GST implementation issues. Based
on various management interactions, we see limited positive/negative impact of government’s
Ayushman Bharat Scheme in its current structure.

 Consolidation of network and cost optimization to drive growth in hospitals

Going forward, we expect mature hospitals to recover (late single-digit to early double-digit) and post
healthy growth, as we expect hospitals to focus on optimizing utilization of these assets through case
mix upgradation, lowering average length of stay leading to improved average revenue per occupied
bed (ARPOB). This combined with focus on cost efficiencies should drive margin expansion across these
assets. Apollo management’s commentary on 150-200bps improvement in mature hospital profitability
is a case in point. NH’s management too has been guiding continued revenue/margin growth in its
mature clusters, adding to its strong performance in recent quarters.

A slower pace of new hospital additions too will lower the profitability drag that typically accompanies
new hospital commissioning in the initial 2-3 years. In the past, losses from commissioning of some or
the other new units across hospital networks at regular intervals built the profitability pressure from this
cluster. Capacity addition slowdown will provide enhanced bandwidth to hospital networks to
accelerate scale-up of capacities added over last 3-4 years. Consequently, we expect losses from new
hospitals to reduce significantly/increase in profitability contribution from this cluster of hospitals across
groups. For instance, for Apollo, EBITDA contribution from new hospitals improved from losses of
Rs60m in FY17 to a gain of Rs822m in FY19, and we expect the same to improve to Rs1.33bn in FY21E. In
the case of NH, we envisage progressive reduction in start-up hospital losses from Rs703m in FY19 to
Rs500m in FY21E. We expect a similar trend in HCG, post FY21E, as the company has culminated its
ongoing expansion plans.

Strong focus on cost optimization across hospital networks will further reinforce this positive trajectory.
In particular, medical talent costs (potentially the biggest cost element for a tertiary care set-up) should
gradually rationalize. Slowdown in new hospital additions and growing intent among hospital networks
to prioritize network brand over star doctor brand in attracting patients too would aid this growth.
Given the multiple large-ticket transactions involving buyouts by large hospital operators in the NCR
region, we see this trend to play out fairly strong in this region.

6 | IDFC SECURITIES 11 July 2019

 Hospitals

 Hospitals set to re-rate?

The long term story in private healthcare remains exciting, due to low penetration in the country and
favourable change in demographics. For the near term, we remain positive on hospitals in the listed
healthcare space, as we expect increased profitability on likely consolidation.

Overall, we estimate EBITDA CAGR across hospital networks to improve strongly, though the trajectory
will vary across hospitals, based on ageing/profitability profile of their networks. With easing capex
spends, we expect FCF to improve, consequently enhancing return ratios. This should drive a re-rating
across stocks, whenever the consolidation is visible.

Exhibit 15: EBITDA CAGR of hospitals set to improve…

EBITDA CAGR (%) FY15-18 FY18-21E
Apollo - Consolidated 3 21
Apollo – Hospital services 3 13
Fortis (EBITDAC – ex diagnostic) 3 1*
NH 18 25
HCG 18 14
EBITDA Margin (%) FY17 FY18 FY19 FY20E FY21E
Apollo 10.0 9.6 11.1 11.1 11.2
Fortis* (EBITDAC – ex diagnostic) 14.7 13.6 9.5 9.1* 10.4*
NH 12.2 9.3 10.1 10.9 11.8
HCG 15.0 14.3 12.8 13.2 13.8
Source: Company, IDFC Securities Research; * Bloomberg estimates

Exhibit 16: ...along with a boost in FCF,..

FCF (Rs m) FY17 FY18 FY19 FY20E FY21E
Apollo (1,819) (1,848) 2,435 3,990 7,358
NH 319 (5,589) 1,421 990 1,790
HCG (436) (1,265) (869) (1,809) 145
Source: Company, IDFC Securities Research

Exhibit 17: ..will reduce leverage…

Net debt-to-EBITDA (x) FY17 FY18 FY19 FY20E FY21E
Apollo 3.4 4.2 3.3 3.0 2.4
NH 0.7 3.6 2.5 1.9 1.4
HCG 3.3 3.5 4.8 4.9 4.1
Source: Company, IDFC Securities Research

Exhibit 18: ..and in turn, boost return ratios

RoCE (%) FY17 FY18 FY19 FY20E FY21E
Apollo 6.1 5.7 8.1 9.2 10.6
NH 12.8 7.4 7.7 9.8 11.7
HCG 5.4 4.7 3.4 3.5 4.7
Source: Company, IDFC Securities Research

Exhibit 19: Peer comparison

Price Mkt Cap Reco TP EBITDA (Rs m) EBITDA CAGR (%) PE (x) EV/EBITDA (x)
(Rs) (Rs bn) (Rs) FY19 FY20E FY21E FY19-21E FY20E FY21E FY20E FY21E
Apollo Hospitals 1,311 182.3 OP 1629 10,637 12,212 13,913 14.4 64.0 50.2 18.0 15.6
Healthcare Global 138 12.1 OP 223 1,252 1,457 1,741 17.9 (97.7) (848.7) 13.0 10.9
Narayana Hrudayalaya 233 47.6 OP 270 2,878 3,486 4,114 19.6 47.6 34.9 15.8 13.1
Fortis Healthcare* 130 97.9 NR NA 4410 6509 7975 21.8 40.0 29.3 14.2 11.9
Aster DM Healthcare* 115 58.3 NR NA 8631 9975 11898 11.3 14.8 10.9 8.6 7.2
Source: IDFC Securities Research; OP=Outperformer, UP=Underperformer, N=Neutral, NR=Not Rated; *Bloomberg estimates

7 | IDFC SECURITIES 11 July 2019

 Hospitals

 Valuation basis for stocks under coverage

• We value Apollo on an SOTP basis, with the hospital segment valued at 17x FY21E EBITDA and
Standalone Pharmacies (SAP) segment at 20x FY21E EBITDA. We have an Outperformer rating on
the stock with a target price of Rs1629.
• We value NH on an SOTP basis, with the Cayman segment valued at 12x and the Indian business at
16x FY21 EBITDA. We have an Outperformer rating on the stock with a target price of Rs270.
• HCG is valued at 15x FY21E EBITDA. We have an Outperformer rating on the stock with a target price
of Rs223.
• Apollo and NH are our preferred picks to play this ongoing turnaround.

8 | IDFC SECURITIES 11 July 2019

 Hospitals

Apollo Hospitals Outperformer (US$2.6bn; Mkt cap: Rs181.3bn)

Income statement Key ratios
Year to 31 Mar (Rs Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
FY17 FY18 FY19 FY20E FY21E
m) EBITDA margin (%) 10.1 9.6 11.1 11.1 11.2
Net sales 72,557 82,434 96,174 110,099 124,120
EBIT margin (%) 5.7 5.3 6.9 7.2 7.6
% growth 16.8 13.6 16.7 14.5 12.7
PAT margin (%) 3.1 1.4 2.5 2.6 2.9
Operating expenses 65,263 74,503 85,538 97,888 110,207
RoE (%) 6.1 3.2 6.9 8.0 9.6
EBITDA 7,294 7,931 10,637 12,212 13,913
RoCE (%) 6.1 5.7 8.1 9.2 10.6
% change 6.0 8.7 34.1 14.8 13.9
Gearing (x) 0.7 1.0 1.0 1.0 0.9
Other income 225 324 314 250 250 Net debt/ EBITDA
3.5 4.2 3.4 3.0 2.4
Net interest cost 2,573 2,951 3,270 3,270 3,270 (x)
Depreciation 3,140 3,590 3,955 4,280 4,475 FCF yield (%) (1.6) (0.2) 1.5 2.1 4.0
Pre-tax profit 2,229 1,714 3,735 4,911 6,418 Dividend yield (%) 0.5 0.5 0.5 0.5 0.5
Deferred tax 0 0 0 0 0
Current tax 910 1,119 1,734 2,210 2,888 Valuations
Profit after tax 1,320 595 2,002 2,701 3,530 Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
Preference dividend 0 0 0 0 0 Reported EPS (Rs) 15.9 8.4 17.0 20.5 26.1
Minorities 899 578 359 150 100 Adj. EPS (Rs) 15.9 8.4 17.0 20.5 26.1
Adjusted net profit 2,218 1,173 2,360 2,851 3,630 PE (x) 81.8 154.7 76.9 63.6 50.0
Non-recurring items 0 0 0 0 0 Price/ Book (x) 4.7 5.4 5.2 5.0 4.7
Reported net profit 2,218 1,173 2,360 2,851 3,630 EV/ Net sales (x) 2.9 2.6 2.3 2.0 1.7
% change (6.2) (47.1) 101.2 20.8 27.3 EV/ EBITDA (x) 28.7 27.3 20.5 17.9 15.5
EV/ CE (x) 2.9 2.7 2.6 2.5 2.4
Balance sheet
As on 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m) EBITDA Margin
Paid-up capital 696 696 696 696 696
Preference capital 0 0 0 0 0
EBITDA (Rs m - LHS)
Reserves & surplus 36,018 31,819 32,639 34,400 36,940 EBITDA Margin (% - RHS)
Shareholders'
38,878 33,839 34,688 36,450 38,990
16,000 12.0%
equity
Total current
8,517 5,888 7,131 8,164 9,204
liabilities 12,000 11.0%
Total debt 30,910 37,751 39,277 39,277 39,277
Deferred tax
2,269 2,393 2,975 2,975 2,975
liabilities 8,000 10.0%
Other non-current
803 6,085 7,586 8,345 9,179
liabilities
Total liabilities 42,498 52,117 56,969 58,760 60,634
4,000 9.0%
Total equity &
81,376 85,957 91,657 95,210 99,624
liabilities
Net fixed assets 47,701 51,389 54,572 55,292 53,816
0 8.0%
Investments 4,357 3,436 4,617 4,617 4,617
FY17 FY18 FY19 FY20E FY21E
Cash 5,264 4,172 3,470 3,100 6,098
Other current assets 21,787 23,498 25,537 28,740 31,631 Source: IDFC Securities Research, Company
Deferred tax assets 0 0 0 0 0
Other non-current
2,267 3,462 3,462 3,462 3,462 Shareholding pattern
assets
Net working capital 18,534 21,782 21,875 23,676 28,526 Public &
Total assets 81,376 85,957 91,657 95,210 99,624 Others
6.3%
Cash flow
Year to 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m)
Pre-tax profit 2,229 1,714 3,735 4,911 6,418
Depreciation 3,140 3,590 3,955 4,280 4,475 Foreign
Chg in Working
45.3%
(2,537) (4,340) (796) (2,170) (1,852) Promoters
capital
34.4%
Total tax paid (910) (1,119) (1,734) (2,210) (2,888)
Net Interest 2,573 2,951 3,270 3,270 3,270
Others 0 0 0 0 0
Operating cash Non-
4,561 8,078 9,932 8,840 10,258
flow promoter
Capital expenditure (7,518) (8,473) (7,138) (5,000) (3,000) corporate
Free cash flow holding
(2,958) (395) 2,794 3,840 7,258
(a+b) 0.9%
Chg in investments (834) 921 (1,181) 0 0 Govt Institutions
Holding 12.9%
Debt raised/(repaid) 4,168 6,841 1,526 0 0
0.2%
Net interest (2,573) (2,951) (3,270) (3,270) (3,270)
Capital As of Mar 19
0 0 0 0 0
raised/(repaid)
Dividend (incl. tax) (1,090) (1,090) (1,090) (1,090) (1,090)
Other items 2,479 (4,157) 129 0 0
Net chg in cash 1,476 (1,092) (704) (369) 2,998

9 | IDFC SECURITIES 11 July 2019

 Hospitals
HealthCare Global Enterprises Outperformer (US$181m; Mkt cap: Rs12.4bn)
Income statement Key ratios
Year to 31 Mar (Rs Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
FY17 FY18 FY19 FY20E FY21E
m) EBITDA margin (%) 15.0 14.3 12.8 13.2 13.8
Net sales 7,001 8,307 9,787 11,061 12,630
EBIT margin (%) 6.9 5.7 4.1 4.2 5.1
% growth 19.8 18.7 17.8 13.0 14.2
PAT margin (%) 3.3 0.7 (3.2) (1.1) (0.1)
Operating expenses 5,951 7,119 8,535 9,604 10,890
RoE (%) 4.9 1.2 (5.0) (2.0) (0.2)
EBITDA 1,050 1,188 1,252 1,457 1,741
RoCE (%) 5.4 4.7 3.4 3.5 4.7
% change 23.9 13.2 5.4 16.4 19.5
Gearing (x) 0.7 0.8 0.9 1.2 1.2
Other income 97 128 74 70 70 Net debt/ EBITDA
3.4 3.9 4.8 4.9 4.1
Net interest cost 230 424 699 655 655 (x)
Depreciation 568 715 851 996 1,095 FCF yield (%) (4.1) (7.6) (3.1) (8.6) 6.0
Pre-tax profit 348 178 (224) (124) 61 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Deferred tax 91 (33) (14) 0 0
Current tax 27 136 (11) (49) 25 Valuations
Profit after tax 230 76 (199) (74) 36 Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
Preference dividend 0 0 0 0 0 Reported EPS (Rs) 2.7 1.9 (3.5) (1.4) (0.2)
Minorities 0 (14) (110) (50) (50) Adj. EPS (Rs) 2.7 0.7 (3.5) (1.4) (0.2)
Adjusted net profit 230 62 (309) (124) (14) PE (x) 54.3 205.6 NM NM NM
Non-recurring items 0 108 0 0 0 Price/ Book (x) 2.6 2.2 2.0 2.2 2.2
Reported net profit 230 169 (309) (124) (14) EV/ Net sales (x) 2.4 2.2 2.0 1.9 1.6
% change 924.0 (26.5) 0.0 0.0 0.0 EV/ EBITDA (x) 15.9 15.2 15.5 14.1 11.8
EV/ CE (x) 1.8 1.7 1.5 1.6 1.4
Balance sheet
As on 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m) EBITDA Margin
Paid-up capital 857 869 879 879 879
Preference capital 0 0 0 0 0
EBITDA (Rs m - LHS) EBITDA Margin (% - RHS)
Reserves & surplus 3,469 4,282 4,582 4,458 4,443
Shareholders'
4,901 5,790 6,541 5,842 5,878
2,000 16.0%
equity
Total current
liabilities
2,883 3,633 4,996 5,149 5,464 1,600 15.0%
Total debt 4,456 4,975 6,277 7,277 8,277
Deferred tax
0 38 40 40 40
1,200 14.0%
liabilities
Other non-current
0 0 0 0 0 800 13.0%
liabilities
Total liabilities 7,339 8,646 11,314 12,467 13,781
Total equity &
12,240 14,437 17,854 18,309 19,659 400 12.0%
liabilities
Net fixed assets 7,720 8,923 10,759 11,064 10,969
0 11.0%
Investments 114 532 491 491 491 FY17 FY18 FY19 FY20E FY21E
Cash 878 288 209 74 1,184
Other current assets 2,773 3,369 5,034 5,318 5,654 Source: IDFC Securities Research, Company
Deferred tax assets 146 231 269 269 269
Other non-current Shareholding pattern
609 1,093 1,093 1,093 1,093
assets
Net working capital 768 24 246 243 1,374 Public &
Others
Total assets 12,240 14,437 17,854 18,309 19,659 17.7%

Foreign
Cash flow 33.1%
Year to 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m)
Pre-tax profit 348 178 (224) (124) 61
Depreciation 568 715 851 996 1,095
Chg in Working
155 154 (302) (132) (22)
capital
Total tax paid (27) (136) 11 49 (25)
Net Interest 230 424 699 655 655 Promoters
Others 0 108 1,248 (1,248) 0 24.1%
Operating cash
1,275 1,443 2,284 196 1,764
flow
Capital expenditure (1,789) (2,402) (2,687) (1,300) (1,000)
Free cash flow Institutions
(514) (960) (403) (1,104) 764 25.1%
(a+b)
Chg in investments 522 (417) 41 0 0
Debt raised/(repaid) 491 519 1,302 1,000 1,000
Net interest (230) (424) (699) (655) (655)
As of Mar 19
Capital
6 12 10 0 0
raised/(repaid)
Dividend (incl. tax) 0 0 0 0 0
Other items (257) 629 1,211 (624) 0
Net chg in cash 266 (590) 545 (758) 1,109

10 | IDFC SECURITIES 11 July 2019

 Hospitals
Narayana Hrudayalaya Outperformer (US$692m; Mkt cap: Rs47.5bn)
Income statement Key ratios
Year to 31 Mar (Rs Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
FY17 FY18 FY19 FY20E FY21E
m) EBITDA margin (%) 12.2 9.3 10.1 10.9 11.8
Net sales 18,781 22,809 28,609 32,127 34,778
EBIT margin (%) 7.9 4.9 5.3 6.2 7.2
% growth 16.4 21.4 25.4 12.3 8.2
PAT margin (%) 4.5 2.2 2.1 3.1 3.9
Operating expenses 16,493 20,686 25,731 28,641 30,664
RoE (%) 9.2 5.1 5.5 8.7 10.9
EBITDA 2,288 2,123 2,878 3,486 4,114
RoCE (%) 12.8 7.4 7.9 10.0 11.9
% change 31.1 (7.2) 35.6 21.1 18.0
Gearing (x) 0.2 0.7 0.6 0.6 0.5
Other income 175 189 167 140 141 Net debt/ EBITDA
0.7 3.6 2.5 2.0 1.5
Net interest cost 218 468 714 714 714 (x)
Depreciation 799 1,000 1,374 1,483 1,602 FCF yield (%) 1.6 (14.3) 3.3 1.2 3.8
Pre-tax profit 1,366 798 934 1,357 1,868 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Deferred tax 0 0 0 0 0
Current tax 524 290 341 357 504 Valuations
Profit after tax 843 509 593 1,000 1,364 Year to 31 Mar FY17 FY18 FY19 FY20E FY21E
Preference dividend 0 0 0 0 0 Reported EPS (Rs) 4.1 2.5 2.9 4.9 6.7
Minorities (1) 1 0 0 0 Adj. EPS (Rs) 4.1 2.5 2.9 4.9 6.7
Adjusted net profit 842 509 593 1,000 1,364 PE (x) 55.8 92.3 79.3 47.0 34.5
Non-recurring items (13) 5 0 0 0 Price/ Book (x) 4.9 4.5 4.3 4.0 3.6
Reported net profit 828 515 593 1,000 1,364 EV/ Net sales (x) 2.6 2.4 1.9 1.7 1.5
% change 306.0 (37.9) 15.2 68.6 36.5 EV/ EBITDA (x) 21.2 25.8 18.8 15.5 12.9
EV/ CE (x) 4.1 2.9 2.8 2.7 2.4
Balance sheet
As on 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m) EBITDA Margin
Paid-up capital 2,044 2,044 2,044 2,044 2,044
Preference capital 0 0 0 0 0
EBITDA (Rs m - LHS)
Reserves & surplus 7,587 8,314 8,768 9,767 11,131 EBITDA Margin (% - RHS)
Shareholders'
9,633 10,360 11,040 11,815 13,179
4,400 14.0%
equity
Total current
4,639 6,585 6,940 7,654 8,083
liabilities 3,300 10.5%
Total debt 1,947 8,015 8,136 8,136 8,136
Deferred tax
248 315 438 438 438
liabilities 2,200 7.0%
Other non-current
0 0 0 0 0
liabilities
Total liabilities 6,835 14,915 15,515 16,228 16,657
1,100 3.5%
Total equity &
16,468 25,276 26,554 28,043 29,836
liabilities
Net fixed assets 10,767 18,170 18,507 18,523 18,421
0 0.0%
Investments 961 88 174 174 174 FY17 FY18 FY19 FY20E FY21E
Cash 341 353 1,007 1,059 2,135
Other current assets 3,818 6,005 6,206 7,626 8,446 Source: IDFC Securities Research, Company
Deferred tax assets 0 0 0 0 0
Other non-current Shareholding pattern
581 660 660 660 660
assets Public &
Net working capital (480) (228) 273 1,032 2,498 Others Foreign
7.0% 16.0%
Total assets 16,468 25,276 26,554 28,043 29,836

Cash flow
Year to 31 Mar (Rs
FY17 FY18 FY19 FY20E FY21E
m)
Pre-tax profit 1,366 798 934 1,357 1,868 Institutions
13.2%
Depreciation 799 1,000 1,374 1,483 1,602
Chg in Working
374 (241) 154 (707) (390)
capital Govt
Total tax paid (524) (290) (341) (357) (504) Holding
Net Interest 218 468 714 714 714 0.0%
Others (13) 5 449 (449) 0
Operating cash
2,220 1,740 3,283 2,041 3,290
flow
Capital expenditure (1,464) (8,482) (1,710) (1,500) (1,500)
Promoters
Free cash flow
756 (6,742) 1,573 541 1,790 63.9%
(a+b)
Chg in investments (89) 873 (86) 0 0
Debt raised/(repaid) (406) 6,068 121 0 0
Net interest (218) (468) (714) (714) (714)
As of Mar 19
Capital
0 0 0 0 0
raised/(repaid)
Dividend (incl. tax) 0 0 0 0 0
Other items 138 326 7 72 71
Net chg in cash 101 12 654 52 1,076

11 | IDFC SECURITIES 11 July 2019

 Hospitals
Disclaimer
This document has been prepared by IDFC Securities Ltd (IDFC SEC). IDFC SEC is a full-service, integrated investment banking, and institutional broking
group. There are no material disciplinary actions taken against IDFC SEC.
This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the
information herein on reasonable basis, the opinions and information in this report are subject to change without notice and IDFC SEC, its subsidiaries
and associated companies, their directors and employees (“IDFC SEC and associates”) are under no obligation to update or keep the information current.
Also, there may be regulatory, compliance, or other reasons that may prevent IDFC SEC and its associates from doing so. Thus, the opinions expressed /
information provided herein should be considered those of IDFC SEC as of the date on this document only. We do not make any representation either
express or implied that information contained herein is accurate or complete and it should not be relied upon as such.
The information contained in this document has no regard to the specific investment objectives, financial situation or particular needs of any specific
recipient. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.
The investment discussed or views expressed in the document may not be suitable for all investors. Investors should make their own investigations as
they deem necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the
merits and risks involved) and investment decisions based upon their own financial objectives and financial resources. Investors assume the entire risk of
any use made of the information contained in the document. Investments in general involve some degree of risk, including the risk of capital loss. Past
performance is not necessarily a guide to future performance and an investor may not get back the amount originally invested.
Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or income
derived from, the investment. In addition, investors in securities, the values of which are influenced by foreign currencies, effectively assume currency risk.
Associates of IDFC SEC may have issued other reports that are inconsistent with and reach different conclusions from, the information presented in this report.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state,
country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IDFC
SEC and its associates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for
sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of,
and to observe, such applicable restrictions.
Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's
fundamentals and, as such, may not match with a report on a company's fundamentals.
IDFC SEC and its associates, their directors, officers, and employees may from time to time have positions in, purchase or sell, or be materially interested
in any of the securities mentioned or related securities. IDFC SEC and associates may from time to time solicit from, or perform investment banking, or
other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall IDFC SEC, any of its associates or any third
party involved in, or related to, computing or compiling the information have any liability for any damages of any kind including but not limited to any
direct or consequential loss or damage, however arising, from the use of this document. Any comments or statements made herein are those of the
analyst and do not necessarily reflect those of IDFC SEC and associates.
This document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain
confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited.
Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. IDFC SEC will not treat recipients
as customers by virtue of their receiving this report.
The analyst certifies that all of the views expressed in this research report accurately reflect his/her personal views about any and all of the subject
issuer(s) or securities. The analyst certifies that no part of his / her compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) and/or views expressed in this report.

Additional Disclosures of interest:

1. The Research Analyst(s), IDFC Sec, does not have any financial interest in the company(ies)/ entities covered in this report. The associate of Research
Analyst or his relative, might have financial interest (e.g. as investor, etc.) in the company(ies)/ entities covered in this report. Please read this in
conjunction with other disclosures herein.
2. The Research Analyst, IDFC SEC or relatives of the Research Analyst collectively do not hold more than 1% of the securities of the company (ies)
covered in this report as of the end of the month immediately preceding the date of distribution of the research report.
3. Associates of IDFC SEC are engaged in different businesses and may collectively hold more than 1% of the securities of the company (ies) covered in
this report as of the end of the month immediately preceding the date or distribution of the research report.
4. The Research Analyst, his associate, his relative and IDFC SEC do not have any material conflict of interest at the time of publication of this research report.
5. IDFC SEC and its associates might have received compensation including for investment banking or merchant banking or brokerage services or
banking services or for any other products or services from the company(ies) covered in this report, in the past twelve months. IDFC SEC and its
Research Analysts did not receive any compensation or other benefits from the companies/entities mentioned in the report or third party in
connection with preparation of the research report.
6. IDFC SEC or its associates might have managed or co-managed in the previous twelve months, a private or public offering of securities for the
company (ies)/ entities covered in this report or might have been mandated by the company (ies)/ entities covered in this report for any other
assignment in the previous twelve months.
7. The Research Analyst might have served as an Officer, Director or employee of the company (ies) covered in the Research report.
8. The Research Analyst and IDFC SEC has not been engaged in market making activity for the company(ies) covered in the Research report.
Explanation of Ratings:
1. Outperformer : More than 5% to Index
2. Neutral : Within 0-5% (upside or downside) to Index
3. Underperformer : Less than 5% to Index

Copyright in this document vests exclusively with IDFC Securities Ltd.

SEBI Registration Nos. of IDFC Securities Limited

Research Analyst INH 000000 131
Stock Broker
NSE Capital Markets
NSE Futures & Options
INZ000207137
BSE Capital Markets
BSE Futures & Options
Merchant Banker INM000011336

US Disclaimer:
This report is distributed in the US, by IDFC Securities (Parent of IDFC Capital (USA) Inc.) only to major U.S institutional investors (as defined in Rule
15a-6 under the U.S Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption (a)(2) of the Rule and any transaction effected
by a U.S customer in the securities described in this report must be effected through IDFC USA as defined in the Rule.
Neither the report nor any analyst who prepared or approved the report is subject to U.S legal requirements or Financial Industry Regulatory
Authority, Inc. (“FINRA”) or other regulatory requirements pertaining to research reports or research analysts.
This communication is produced by an analyst/strategist of IDFC Securities Ltd.
This material was produced by IDFC Securities solely for information purposes and for the use of the recipient, It is not to be reproduced under any
circumstances and is not be copied or made available to any person other that the recipient, it is distributed in the United States of America by IDFC
Securities under 15a-6(a)(2). And elsewhere in the world by IDFC Securities or any authorised associate of IDFC Securities.

12 | IDFC SECURITIES 11 July 2019

 Hospitals
www.idfc.com

Anish Damania CEO anish.damania@idfc.com 91-22-4202 2522

Research Analyst Sector/Industry/Coverage E-mail Tel.+91-22-4202 2500

Shirish Rane HoR; Construction, Power, Infrastructure Developers shirish.rane@idfc.com 91-22-4202 2575
Dhananjay Sinha Head Strategy and Chief Economist dhananjay.sinha@idfc.com 91-22-4202 2569
Nitin Agarwal Pharmaceuticals, Agri-inputs, Midcaps nitin.agarwal@idfc.com 91-22-4202 2568
Mahrukh Adajania Financials mahrukh.adajania@idfc.com 91-22-4202 2574
Bhoomika Nair Engineering, Cement, Power Equipment, Logistics bhoomika.nair@idfc.com 91-22-4202 2561
Deepak Jain Automobiles, Auto ancillaries deepak.jain1@idfc.com 91-22-4202 2562
Rohit Dokania FMCG, Retail, Paints, Media, Midcaps, Home Improvement rohit.dokania@idfc.com 91-22-4202 2567
Mohit Kumar, CFA Construction, Power, Infrastructure Developers mohit.kumar@idfc.com 91-22-4202 2573
Ashish Kejriwal Metals, Mining ashish.kejriwal@idfc.com 91-22-4202 2594
Mehul Desai FMCG, Paints, Alcoholic Beverages, Retail mehul.desai@idfc.com 91-22-4202 2640
Miloni Bagadia Agri-inputs, Midcaps miloni.bagadia@idfc.com 91-22-4202 2663
Sanket Chheda Financials sanket.chheda@idfc.com 91-22-4202 2565
Aasim Bharde, CFA Media, Midcaps, Home Improvement, Paints aasim.bharde@idfc.com 91-22-4202 2576
Basant Joshi Metals, Mining basant.joshi@idfc.com 91-22-4202 2592
Adit Makhijani Engineering, Cement, Power Equipment, Logistics adit.makhijani@idfc.com 91-22-4202 2546
Nirmal Gopi Pharmaceuticals, Midcaps nirmal.gopi@idfc.com 91-22-4202 2552
Vipul Agrawal Automobiles, Auto ancillaries vipul.agarwal@idfc.com 91-22-4202 2532
Bhawana Chhabra, CFA Strategy bhawana.chhabra@idfc.com 91-22-4202 2629
Neeraj Agarwal Alternative Research neeraj.agrawal@idfc.com 91-22-4202 2625
Dharmendra Sahu Database Analyst dharmendra.sahu@idfc.com 91-22-4202 2580

Equity Sales Designation E-mail Tel.+91-22-4202 2500

Vijayaraghavan G SVP, Sales vijayaraghavan.g@idfc.com 91-22-4202 2690
Amit Kapoor SVP, Sales amit.kapoor@idfc.com 91-22-4202 2507
Chandan Asrani VP, Sales chandan.asrani@idfc.com 91-22-4202 2540
Yohann Carvalho AVP, Sales yohann.carvalho@idfc.com 91-22-4202 2513
Equity Sales Dealing Designation E-mail Tel.+91-22-4202 2500
Suryakant Bhatt Director & Head - Sales trading suryakant.bhatt@idfc.com 91-22-4202 2693
Mukesh Chaturvedi Director, Sales trading mukesh.chaturvedi@idfc.com 91-22-4202 2512
Rajashekhar Hiremath SVP, Sales trading rajashekhar.hiremath@idfc.com 91-22-4202 2516

IDFC Securities IDFC Capital (USA) Inc,

6th Floor, One Indiabulls Centre, Tower 1C, Regus Business Centre
841 Jupiter Mills Compound, Senapati Bapat Marg, 600 Third Avenue,
Elphinstone, Mumbai 400 013. 2nd Floor,
INDIA New York, 10016

Board: +91 22 4202 2500 Tel: +1 646 571 2303

Fax: +91 22 4202 2504 Fax: +1 646 571 2301

Our research is also available on Bloomberg and Thomson Reuters

13 | IDFC SECURITIES
For any assistance in access, please contact research@idfc.com
11 July 2019