PL Stock Report - HealthCare Global Enterprises (HCG IN) - Q2FY24 Result Update - In-line EBITDA; scale up in margins is key - BUY

HealthCare Global Enterprises (HCG IN) – Param Desai – Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs374 | TP: Rs420

Q2FY24 Result Update – In-line EBITDA; scale up in margins is key

Quick Pointers:

♦ EBITDA margin guidance close to 20% by Q4FY24 or Q1FY25.

♦ Plans to add additional 6 LINAC machines in the next 18 months.

HealthCare Global Enterprises (HCG) Q2 consolidated EBITDA grew by 13% YoY (14% QoQ) to Rs. 846mn; in-line with our estimates aided by ramp-up in new units. We expect margins to improve, as benefit of commercialization of total 5 LINAC machines will reflect in H2FY24 along with scale up in new centers. The company’s asset light approach with focus on partnering has made its business model more capital efficient and scalable, in our view. Our FY24/FY25E EBITDA stand remains unchanged and we expect 23% EBITDA (PRE IND AS) CAGR over FY23-25E. At CMP, the stock trades at 16x FY25E EV/EBITDA adjusted for rentals. Maintain ‘Buy’ rating with a revised TP of Rs 420/share (earlier at Rs.385/ share) valuing at 16x (assign multiple is 25-30% discount to peers) on Sept 2025E EV/EBITDA as we roll forward.

♦ In-line EBITDA: HCG reported post IND AS EBITDA of Rs. 846mn; in-line with our estimates. Existing centers reported profitability with EBITDA growth of 8% YoY (9% QoQ) to Rs 832mn, while new centers reported strong EBITDA growth of 21% YoY (23% QoQ) to Rs 122mn. Margin improved by 125 bps QoQ (declined 40bps YoY) to 17.4% due to ramp up in new units and absence of one-time corporate cost.

♦ Strong ARPOB growth & ramp-up in new units drove revenue growth of 16% YoY to Rs 4.9bn, in line with our estimate. Existing centers grew by 13% YoY while new centers continue to see healthy ramp-up with revenue growth of 29% YoY. Milann centers revenue grew 7% YoY which continues to contribute 4% to the total revenues. LINAC capacity utilization was at 61% vs 67% in Q2FY23; contributed 17% to the total revenues. ARPOB improved 14% YoY; 6% QoQ to Rs 42K per day. Overall occupancy declined to 63.6% vs 66.9% in Q1 (66.4% in Q2FY23); on account of commercialization of 3 new LINAC in Q2. Net debt increased by Rs935mn QoQ to Rs3.1bn.

♦ Key con-call takeaways: (1) Concluded acquisition of 50 beds hospital in Indore in Oct which generates Rs.300mn annual revenue. Mgmt focus will be on integrating new clinical talent and improving operational efficiency (2) Nagpur generated EBITDA of Rs.21mn given consolidation in Q2. However, mgmt. guided for higher EBITDA growth in Q3-Q4FY24 from both the units on account of full quarter impact. (3) Plans to expand 50 beds with capex requirement Rs.400-500mn and will be operationalized in 2 years. (4) Launched an additional dedicated women's cancer wing in centers of South Mumbai. Operationalized 3 new LINAC machines and plans for further commercializing 6 new LINAC machines over 18 months. (5) Annual lease cost at Rs. 750mn (~4% of revenues). (6) Mumbai, Kolkata and Nagpur saw revenue growth of 41%, 42% and 60% respectively attributed towards newly hired clinical talent. (7) Operationalized robotic radiation surgery machines in Baroda, Mumbai and Kolkata. (8) Plans to add additional capacities in Mumbai markets such as added one linear accelerator, first robotic program in Borivali, launched dedicated women’s cancer care center in Colaba, South Mumbai center.

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