Improving mix will keep the dream growth rally intact for Narayana stock

Return ratios to double over the FY19-22 period

With a jump of 61 per cent, Narayana Hrudayalaya was the best-performing hospital stock last year. 

Given the 6 per cent addition to those gains on Wednesday, the rally seems to have more steam left. Investors have been switching from large generic pharma companies (which have been pegged back by compliance issues) to health care service providers, in search of higher returns.

Further, completion of capital expenditure programme, asset light expansions and improving return ratios have led to the switch. For Narayana, in addition to the strong operating performance over the last five quarters, there are additional triggers. 

The losses at new hospitals at Gurugram, Mumbai and Dharamshila are expected to come down going ahead. This is due to higher occupancies, scaling up of operations and expansion into new categories. 

The three hospitals posted a Rs 70 crore loss at the operating profit level in FY19. With utilisation levels improving, the hospitals are expected to turn positive at the operating profit level over the next two years. 

The growth in its multi-speciality hospital at the Cayman Islands is another area investors are keeping an eye on. 

The hospital targets North American patients given the price difference of treatment at its unit and in the US. The hospital posted a 58 per cent growth in operating profit led by higher utilisation and improving mix. Analysts at Elara Capital believe that the addition of an oncology unit will drive the revenues and profits of this overseas venture. 

The Cayman subsidiary accounts for a quarter of the consolidated operating profit of the company. 

 Core growth is expected to continue at its Bengaluru unit where it is adding complex procedures and programmes to boost revenues and improve its mix. Cost control measures and higher share of overseas patients should also help. The company is enhancing its capacity and investing in equipment to offer a wider range of services at its other centres across India. 

Analysts at ICICI Securities believe that the company’s focus on affordable care and asset right model will improve average realisations and double its return ratios over the FY19-22 period. Given the sharp run up in the stock, investors can look at the same on dips.