Narayana Hrudayalaya (NHL) is one of the leading private healthcare service
providers in India with a strong presence in Karnataka and the Eastern region
with while it is growing its presence is other parts of India as well. The company
has a relatively light asset model with it owning just 1,613 out of its 5,442 operational
beds. It has a strong brand name and is known for its clinical excellence and being an
affordable healthcare service provider. It currently has 23 hospitals.
Potential improvement in profitability: Generally, hospital businesses have a long
gestation period before they mature (in terms of occupancy rates) and it may
operate at a loss for a period of time before achieving profitability. Currently,
NHL is in an investment phase where the company has increased its bed count at
a higher rate in comparison to its peer Apollo Hospitals (Apollo). As a result, its
top-line has grown at a faster rate but its occupancy and profitability levels are
not as high as that of Apollo. Going forward, with NHL’s pace of expansion being
slightly slower than in the past, we expect it to gradually increase its occupancy
rates and enhance its profitability.
Upcoming projects under light asset model to complement growing need for
healthcare delivery in India: Unlike its peers, which have higher number of owned
hospitals, NHL has fewer owned hospitals while the rest are on either lease &
operate, revenue sharing, or managed basis. Going forward, the company plans
to expand its bed-count following the asset light route, which would include PPP or
on operation and management basis, to grow its presence in other parts of the
country. Moreover, India lags behind other developing and developed countries
in terms of overall bed density, total expenditure on healthcare, and consumers
here incur a higher out-of-pocket expenditure on healthcare. We believe that the
company can gradually build its presence with efficient use of capital and by
leveraging on its brand name to capitalize on the available opportunity in the
under-penetrated healthcare delivery market in India.
Outlook and Valuation: Currently, NHL’s operating margin is lower than its close
peer Apollo Hospitals on account of lower realizations (focus on affordable
healthcare) and has lower occupancy rates. Since the hospital business has longer
gestation period, we expect the occupancy and overall profitability to improve
over a longer period of time. On the valuation front, at the upper end of the price
band, FY2016E annualized EV/Sales multiple works out to 3.4x for NHL which is
not at a significant discount to Apollo (which trades at 3.6x). Hence we have a
Neutral view on the IPO from a short term perspective. However, investors with a longer
term investment horizon can subscribe to the issue considering that the company’s
performance is expected to be more favorable in the longer run as the hospital business
entails a longer gestation period and takes time to perform at optimum levels.

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