This Multibagger Small Cap Hospital Stock Gets a Buy Call, Stock Price Likely to Jump

Outlook and stock returns

The current share price is Rs 705.55/share. The 52-week low of the stock is Rs 491.90/share recorded on October 21, 2021, and the 52-week high is Rs 777/share recorded on March 30, 2022, respectively.

Returns on investment

Returns on investment

The stock over the past week has fallen 2.53%. While in the past 1 and 3 months, it gave positive returns of 6.57% and 7.49%, respectively. Over the past 1 year, the stock has yielded a positive return of 33.69%. In the last 3 years it gave a multibagger return of 185.42%, while in the last 5 years it gave 136.755, a mulibagger return.

Outlines of the transaction

Outlines of the transaction

NARH has signed a Business Transfer Agreement (BTA) with Shiva and Shiva Orthopedic Hospital (Sparsh Hosur Road Unit) located in Narayana Health City Campus, Bangalore, where NARH already has two flagship hospitals operational: NH Cardiac sciences (offers heart-related services only) and Mazumdar Shaw Medical Center (multi-specialty hospital offering services other than cardiac, orthopedic and trauma). The company has agreed to pay Rs2bn in advance and to subscribe for Rs. 800 million optionally convertible debentures (OCD) to be repaid after 4 years. NARH would have the right to convert the OCDs into shares of the company (Shiva) in the event of default. There is no intention of NARH to acquire any further units from Shiva and the acquisition will be completed before CY Dec-22.

Expensive acquisition, but NARH will offer the full range of services in Health City

Expensive acquisition, but NARH will offer the full range of services in Health City

The Sparsh unit has 100 beds operational for a decade which generated revenue of Rs490mn and Rs180mn in FY22 & 23 (4 months) along with healthy profitability. NARH flagship units in Health City generate +25-30% OPM. Assuming similar profitability levels, acquisition amounts to 16-17x EV/EBITDA and Rs 28mn/bed in FY22. Prima facie acquisition is expensive (usually the cost/bed including land in subways is Rs 14-15 mins/bed), but it allows NARH to offer the full range of healthcare services in the city ​​of health. Assuming that the money returns to NARH after 4 years, Rs800mn, the acquisition is established at 12-13x EV/EBIDTA and Rs20mn/lit.

Increase in investment spending in India and the Caymans

Increase in investment spending in India and the Caymans

NARH allocated Rs 10 billion of investments in FY23 which includes a new unit in Caymans, inorganic opportunities and green/disused areas expansion in India business. The company’s flagship units in Health City are operating at optimum utilization levels, enabling brownfield capital expenditure of Rs 5 billion over the next 3 years in the future. set of Health City. It is also planned to strengthen the capabilities of the Sparsh unit. Currently, NARH has a net debt of Rs. 800mn and generates strong FCF across the business.

Outlook

Outlook

Acquisition of 100-bed unit in Health City, Bangalore Narayana Hrudayalaya (NARH) recently signed an agreement with Shiva and Shiva Orthopedic Hospital to acquire its 100-bed Orthopedic and Trauma Hospital in Bengaluru on the basis of a sale down to Rs2.8bn (Rs800mn to be recovered after 4 years). Although the acquisition seems expensive, it will provide a full range of services to Health City. We see limited financial impact given the small size of the transaction, in addition this acquisition is in line with Rs10bn capex guidance as guided by management. for FY23.

Buy for a target price of Rs 810/share

Buy for a target price of Rs 810/share

The brokerage said, “We believe NARH’s aggressive investment plans in India as well as operations in Cayman Islands over the next 2-3 years will improve growth visibility beyond FY24. Additionally, the company’s ability to generate healthy margins/profits in the new Cayman unit will be a controllable key. We are factoring in the $10 million EBITDA from the new Cayman unit for FY24. Overall, we expect 22% EBITDA CAGR from FY22 to FY24E and we maintain a “Buy” rating at TP of Rs. 810/share, based on 20x FY24E EV/EBITDA for India and 16x EV/EBITDA for Cayman Hospitals. At CMP, the stock is trading at 16x EV/EBITDA (adj for IND AS) and 27x P/E on FY24E.

Disclaimer

Disclaimer

The stock was picked from Prabhudas Lilladher’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

Richard L. Militello