PL Stock Report: HealthCare Global Enterprises (HCG IN) - Q1FY24 Result Update - Margins to improve - BUY

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

Rating: BUY | CMP: Rs331 | TP: Rs385

Q1FY24 Result Update - Margins to improve

Quick Pointers:

♦ 100% ownership at Nagpur unit and acquired 50 bedded Indore facility.

♦ New centers like Kolkata and Mumbai should ramp up.

HealthCare Global Enterprises (HCG) Q1 consolidated EBIDTA grew by 3% YoY (down 3% QoQ) to Rs. 743mn; 10% below our estimates led by weak margins. We expect margins to improve, as benefit of commercialization of 5 LINAC machines will be reflected from Q2 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. Furthermore, most of the Comprehensive Cancer Centers operate on lease/rental basis with investment only in equipments. Our FY24/FY25E EBIDTA stand reduced by 5%/2% respectively and we expect 23% EBIDTA (PRE IND AS) CAGR over FY23-25E. At CMP, the stock trades at 14x FY25E EV/EBIDTA adjusted for rentals. Maintain ‘Buy’ rating with a revised TP of Rs 385/ share valuing at 16x (assign multiple is 25-30% discount to peers) FY25E EV/EBIDTA.

♦ EBIDTA below our estimates: HCG reported post IND AS EBIDTA of Rs. 743mn; 10% below our estimates. Existing centers reported profitability with EBIDTA growth of 3% YoY (down 1% QoQ) to Rs 761mn, while new centers reported EBIDTA of Rs 99mn (up 19% QoQ). Margin declined by 120 bps QoQ (160 bps YoY) to 16.1% due to ramp up cost of new five LINAC machines commercialization coupled with higher annual inflationary cost increase and recruitment of new clinical talent.

♦ Ramp-up in new units drove revenue growth of 13% YoY to Rs 4.6bn, in line with our estimate. Existing centers grew by 11% YoY while new centers continue to see healthy ramp-up with revenue growth of 22% YoY. Milann centers revenue de-grew 5% YoY (up 4% QoQ) which contributed 4% to the total revenues. LINAC capacity utilization was at 69% in Q1 vs 67% in Q1FY23; contributed 21% to the total revenues. ARPOB improved 4% YoY; flat QoQ to Rs 39.7K per day. Overall occupancy came in at 66.9% (65.1% in Q4). Net debt increased by Rs187mn QoQ to Rs2.2bn.

♦ Key con-call takeaways: (1) HCG increased its stake in Nagpur unit to 100% from 76% and also acquired 50 bedded Hospital (Onco and radiation unit) in Indore on a slump sale basis. Overall Rs1.1bn spend for both transactions of which Rs. 770mn will be paid in cash and Rs. 300mn of debt will be consolidated. Both transactions are EBITDA accretive to tune of Rs120-130mn on annualized basis (2) Greenfield projects in Ahmedabad – Phase II and Whitefield (Extension of Bangalore - COE) are on track with capex plan of Rs. 628mn and Rs.150mn in FY24E (3) Non-functioning of 5 of LINAC machines resulted into a loss of more than 300 operating Radiotherapy beds (high margin biz) in Q1. Currently, 4 out of 5 LINAC machines are already operational in Q2 (4) Guided remaining operational benefits (80% already reflected in FY23) from consultants appointed would be visible in coming quarters. (5) Focus to remain on Kolkata and South Mumbai centers for ramping up in FY24 which should aid margins by 100-150bps (6) Chemotherapy numbers to grow significantly driven by Kolkata and Mumbai units. (7) Milann revenue drop was on account of surrogacy related norms by regulatory in Q1.

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