Company Background & Business Performance
- Narayana Health is a chain of multi-specialty hospitals in India, with its head-quarters in Bengaluru. The hospital chain operates one of the largest telemedicine networks in the world.
- Company's performance in Q1FY18 has been in line with the expectation. It was a mix of healthy growth in the matured centers falling into greater than 5 years’ bucket along with a steady ramp-up at younger hospitals, including the acquired facilities with maturity less than 5 years.
- Headwinds in the form of curb on cardiac stent pricing along with expected cash-burn associated with commissioning a new facility like SRCC Children’s Hospital has affected this quarter’s profitability
- Company is planning for various price readjustments in procedural prices to overcome the impact of stent pricing regulation.
- Company normally does a pricing change in the month of January. Since the stent pricing impact had to be there for six months because there was a restriction in making any changes to the procedural prices. Now that the six months are over, company would soon be changing the prices for procedures mainly the angioplasty packages as the restriction was on cardiac stents.
- The company started running a 300 capacity bed Dharamshila Narayana Super-specialty Hospital in Delhi marking its entry in the NCR region. While this is presently being operated as a pure-play Cancer Hospital, the company is in the process of upgrading it into a Multi-Specialty Advanced Care unit
- Company also acquired a near-complete 230 bedded hospital in Gurugram, close to the Delhi International Airport, which is expected to be commissioned during the last quarter of this fiscal.
- Company has commissioned the premier 207 bedded pediatric SRCC Narayana Hospital at Haji Ali, Mumbai thereby strengthening its foothold in the Western Region.
- Company has exited the management contract at the hospital in Mahuva as it was in a geography which was slightly difficult to manage and also it was not contributing to company's facility in Ahmedabad. Thus, now the number of hospitals managed by company is 3.
Performance of Matured Hospitals
- Matured hospitals ranging between 3 and 5 year have witnessed a growth of 33% in Q1, FY 2017 to 13% this quarter. It is because a couple of hospitals from the erstwhile less than 3 years’ bucket like Whitefield, HSR and Guwahati have actually moved on to this bucket of late and Raipur from this erstwhile 3-5 years's bucket has moved onto the greater than 5 years’ maturity bucket The hospitals in this bucket in themselves have been registering pretty impressive growth, be it the Guwahati facility or the Whitefield facility
- The continuing issue in this bucket has been with a unit like Ahmedabad, though it had turned in the green in Q2, FY 2017, but it again turned into red due to demonetization and cardiac stent price control effects.
- Leaving that aside, this bucket has been performing in line with expectation of a 3 to 5 years’ vintage bucket.
- In profitability profile, there has not been any substantial dip despite the inclusion of three new hospitals in this bucket, which has remained around 9% for some time at least and taking out Ahmedabad from this bucket, this actually improves close to 12%.
- ARPOB of this bucket has seen a sharp improvement from 5.7 to 7.2, which reflects the fact that despite the growth in ARPOB, occupancy has not been impressive. This is the case with the Ahmedabad unit and the HSR unit where certain restructuring work has been going on since some time. Post that, company believes that it would result in strong growth potentials both on the occupied beds as well as the ARPOB movement.
- Operating revenue of INR 521.1 crores, an increase of 15.3% YoY
- EBITDA of INR 55.6 crores in Q1,FY 2018 as compared to INR 5.9 crore in Q1,FY 2017, reflecting an EBITDA margin of 10.7%against 12.4% same quarter last year
- It is roughly estimated that stent price regulation has impacted the EBITDA by INR 40-45 crores on yearly basis which translates to INR 10-11 crore quarterly.
- Net debt of INR 283.9 crores on 30thJune, 2017, reflecting net debt to equity ratio of 0.29
- Matured centers registered 11% YoY growth in Q1, FY 2018 as compared to Q1, FY 2017.
- Younger set of hospitals including the acquired operations grew at 35% YoY on account of impressive ramp up of operations at units like Guwahati and Whitefield.
- Occupancy rate declined to 58.8% in Q1, FY 2018 from 64.8% in Q1, FY 2017
- Cayman facility registered a remarkable 38.6% YoY growth in Q1, FY 2018, this unit reported a revenue ofUSD 9.7 million in Q1, FY 2018 with an EBITDA of USD 0.7 million. The company is bullish about the prospects of this facility in terms of its ability to generate significant cash-surpluses in the future
- The ARPOB in Vaishno Devi Hospital in Jammu was about 7.5 million, occupancy was over 60%, and revenue was 14.8 crores in this quarter. There has been about 75% growth in revenue from last year, so it is neutral at EBITDA level post VGF funding from the shrine board.
- Dharamshila EBITDA is positive and the EBITDA return is ~16%.
- In Q1, FY 2018, the biggest contribution in terms of the loss-making hospital has been the newly commissioned children’s facility at Mumbai, which registered a loss of around 7 crores for this quarter for the three months of operation.
- The effective tax rate is higher this quarter due to the effect of the losses that are there in couple of subsidiaries viz MMRHL (Westbank facilities) and NHSHPL (Mysore and Dharamshila). But for all practical purposes, there should not be any difference in the marginal tax rate year-on-year, or for that matter, quarter-on-quarter
- Company's share of loss in associates has increased in past 2-3 quarters. Company has registered a positive PAT in Cayman in Q4, FY 2017 but this quarter while Cayman has seen a slight negative PAT, but there is one other associate which has contributed to a loss of around 1.4 odd crores in the form of company's investment in the medical technologies software services company called CuraTechnologies. This has led to company's share of loss in associate going up from the last time around
- Company has leveraged debt for its acquisition of Gurugram facility in Q1, FY 2018 with cost of debt less than 9% which is very competitive
- Company is focusing on creating Oncology along with select other niche domains as the next engine of growth.
- NH's Oncology stream is now contributing almost 10% of our In-Patient Revenue which has led to Non-cardiac contribution increasing to 56%. Addition of Dharamshila hospital at Delhi to NH’s umbrella is also a major contributor towards the increasing share of Oncology in the overall business.
- ARPOB for Q1, FY 2018 registered a growth of ~13% YoY to INR 8.1 million from INR 7.2 million in Q1, FY 2017. Company believes that Its strategy around leveraging the role of cutting-edge technology in the field of medicine along with increasing presence in other high yielding specialties like Oncology, Neuro sciencesetc. is yielding desired results
- Professional fee to doctors is a combination of fixed and variable pay and the consultants are usually on three different models. There are 2 types of full-time consultants where there is either a retainer-ship or hybrid of retainer-ship with a variable component. Then there are certain consultants who are at pure fee-for-service who are visiting consultants, there are very few of those
- The variable component would increase in proportion to the increase in business in long run, and as far as the fixed component is concerned, no such significant change is seen in near to medium term.
- With the new hospitals opening, there is usually a mismatch for some period of time when the outgo to the doctors is relatively higher compared to the revenues being generated by those clinicians, so whenever a new hospital is commissioned, there is a little bit of spike happening in the fixed fee, otherwise, the variable component will always be in a linear relationship with the revenue growth.
- Narayana health expects that it would be able to ramp up the bed capacities from currently 5800 operational beds to 7000 beds in next 2-3 year timeframe. It includes the existing and newer facilities. And the capex required for this would be nominal in most of the units
- The company anticipates regular maintenance/replacement/ upgradation CAPEX of around 150 crores annually over the next couple of yearviz. FY 2018 & FY 2019. Any new projects would be an add-on to that.
- The total enterprise value for Gurugram facility acquisition was INR 180 crore which is around 15% discount to the invested capital of around INR 217 crores by the erstwhile promoters of the project. The amount has been paid and accounted for in this fiscal year only.Company anticipates an additional INR 50 crores in this fiscal yeari.e. FY 2018 to make the facility operational.
- The new hospital at Mumbai actually started the inpatient services around April 20 so it has been only two full operational months
- Currently, it is running at the occupancy level of about 10%, but occupancy is expected to go up, the ARPOB was about 1.2 crores whereas the revenue was 1.3 crores in this quarter. The Company expects the occupancy to grow now as they have all the tie-ups in place with various other agencies and the insurance companies
- It is expected that the loss from this facility should go into lakhs by the fiscal year end which is the usual trajectory in every hospital. Also, with relatively higher ARPOB of about 1.22 crores, company expects to be in a fairly comfortable position at the marginal level by the end of this financial year.
- Company is targeting to achieve the break even for this facility by the next fiscal.
- The typical trajectory in most other hospitals has been at least 24 months before hospital becomes EBITDAR positive.
Growth prospects and Future Outlook
- Company acknowledges the fact that there is an unpredictable and challenging regulatory environment at the moment impacting the overall business ecosystem, effects of which is expected to continue in the near to medium term
- The company estimates that given the industrial headwinds as well as the commissioning due for Mumbai facility this fiscal, it is difficult to maintain EBITDA margin in FY 2018 as was for FY2017. The company would try to consolidate its position by taking initiatives on various fronts.
- Company expects to see a large growth from the Northern cluster and the Southern cluster to continue to grow at a good pace and so the Eastern cluster
- Share of International Patients’ segment in the overall business has significantly increased to 10%. It is primarily because of the Company's success story in clinical excellence has caught the attention of patients across the globe namely South Asian countries like Bangladesh, African countries like Kenya, Middle Eastern Nations like Iraq, Yemen etc
- The company expects the traction generated in this segment to continue further with the onset of our newer facilities across NCR and Mumbai.